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Player’s Manual Created by Arthur A. Thompson, Jr. Gregory J. Stappenbeck The University of Alabama Irwin

Player’s Manual

Created by

Arthur A. Thompson, Jr. Gregory J. Stappenbeck

The University of Alabama

Irwin

McGraw-Hill

M c Graw Hill
M
c
Graw
Hill

Boston

Burr Ridge, IL

Dubuque, IA

Madison, WI

New York

San Francisco

St. Louis

Bangkok

Bogatá

Caracas

Lisbon

London

Madrid

Mexico City

Milan

New Delhi

Seoul

Singapore

Sydney

Taipei

Toronto

Contents
Contents

Section 1: The Industry and the Company

.................................................

1

What You Can Expect to Learn 2 ............................................................................ The Company You Will Manage 4 .......................................................................... What the Board of Directors Expects 8 .................................................................. The Industry and Competitive Environment 9 ...................................................... Customers and Distribution Channels 9 ................................................................ Raw Material Supplies 10 ......................................................................................... Manufacturing 11 ...................................................................................................... Weapons of Competitive Rivalry 12 ....................................................................... Overview of The Business Strategy Game 13 .......................................................

Section 2: Obtaining and Running the Company Program

........................

15

Obtaining the Company Program

.......................................................................

16

Installing the Company Program

16 ........................................................................

Creating a Company Disk

17 ....................................................................................

Getting Started

18 ......................................................................................................

Exploring the Menu Bar

19 .......................................................................................

The E-Mail Option

20 ................................................................................................

Section 3: Competition and Demand Forecasts

..........................................

23

Demand Projections for Years 11 and 12 The Factors that Determine Market Share

................................................................

..............................................................

23

25

Competitive Strategy Options The Demand Forecast Screen

................................................................................

..................................................................................

32

33

Section 4: Plant Operations

......................................................................

39

Pertinent Production Issues

..................................................................................... Production and Labor Decisions

.............................................................................. Plant Upgrades and Capacity Additions

.................................................................

43

44

53

Buying, Selling, and Closing Plants

56 .........................................................................

Section 5: Warehouse and Shipping Operations

........................................

59

Warehouse Operations

............................................................................................

60

Shipping Decisions

..................................................................................................

65

Section 6: Sales and Marketing Operations

...............................................

69

Private-Label Marketing Decisions Internet Marketing Decisions

70 .........................................................................

71

74

.................................................................................. Branded Marketing Decisions

.................................................................................

Bids for Celebrities

80 ..................................................................................................

Reports Concerning Marketing Operations

............................................................

81

Section 7: Financing Company Operations

...............................................

87

The Income Statement

............................................................................................. The Cash Flow Report

............................................................................................

88

89

The Balance Sheet

90 ....................................................................................................

The Company’s Bond Rating

.................................................................................. Finance and Cash Flow Decisions

...........................................................................

92

93

ii

Contents (continued)
Contents (continued)

Section 8: Scoring, Reports, Analysis Options, and Strategic Plans

............

99

Scoring Your Company’s Performance

.................................................................

100

The Footwear Industry Report

.............................................................................

103

The Benchmarking Report

..................................................................................... The Competitor Analysis Reports

........................................................................

103

104

Company Reports of Current-Year Results

..........................................................

104

Analysis Options

..................................................................................................

105

Section 9: Decision Making: Recommended Procedures

..........................

107

Concluding Comments

109 ...........................................................................................

Appendix: Planning and Analysis Forms

111

Company Mission and Objectives Form

..............................................................

.......................................................................................

............................................................

113

Company Strategy Form

Industry and Competitive Analysis Form

115

117

Index

.......................................................................................................

119

iii

The Industry and elcome to The Business Strategy Game ! You are joining the senior management
The Industry and
The Industry
and
The Industry and elcome to The Business Strategy Game ! You are joining the senior management

elcome to The Business Strategy Game! You are joining the senior management

team at a $100 million company making athletic footwear. The company's product line is gaining in popularity and the global athletic footwear industry presents some interesting growth opportunities in the world's four major geographic markets—North America, Asia, Europe, and Latin America—and in the newly-emerging online sales segment. You and your co-managers have the challenge of developing and executing a strategy that will propel the company into a prominent and profitable position in the global athletic footwear industry over the next 5 to 10 years. Your company will be in head-to-head competition with a number of other companies pursuing the market potential in athletic footwear and striving for industry leadership.

In playing The Business Strategy Game, you and your co-managers will need to address a number of strategic and operating issues facing your company. Immediate problems include making the company's recent venture into online sales at the company’s Web site a profitable success, dealing with high production costs at the company's Texas plant, and deciding whether to go forward with plans to enter the Latin American market. Longer range, the challenge will be how to build a sustainable competitive advantage, counter the strategic moves of rival companies, and build long- term value for the company’s shareholders.

You and your co-managers will have full authority over the company's selling prices, product quality, customer service effort, advertising, product line breadth, retail outlet network, promotional rebate offers, and online sales at the company’s Web site, thus giving you an array of competitive strategy options in each market arena in which you decide to compete. It will be entirely up to you and your co-managers to decide how to try to out-compete rival companies—whether to strive to become the industry's low-cost producer and use your low-cost advantage to undersell competitors, whether

Section 1: The Industry and the Company

to differentiate your company’s footwear lineup on the basis of quality or service or other attributes, and whether to compete worldwide or to focus on just one or two market segments. You can elect to position the company in the low end of the market, the high end, or stick close to the middle on price, quality, and service. You can put the marketing emphasis on brand-name footwear or you can stress sales to private-label retailers. You can concentrate on selling through independent footwear retailers or you can shift more emphasis to online sales and/or company-owned retail megastores. You can stick with the company’s current North American and Asian production bases or you can build new plants in Europe and/or Latin America. And, you can finance the company's growth with whatever mix of cash, short-term loans, long-term bonds, or new issues of common stock that you deem appropriate. Whichever long-term direction and business strategy is chosen, you and your co-managers will be held accountable for achieving acceptable financial performance, increasing shareholder value, and making the company a respected industry leader. The success your executive team has in managing the company will be based on how well your company compares against other companies on six performance measures: sales revenues, after-tax profits, return on investment, bond rating, stock value, and strategy rating.

Each decision period in The Business Strategy Game represents a year. Very likely, you and your co-managers will be asked to make anywhere from 6 to 12 complete sets of decisions, meaning that you will be in charge of the company for 6 to12 years—long enough to test your strategy-making, strategy-implementing skills. Expect the action to be fast-paced and exciting as industry conditions change and as companies jockey for market position and competitive advantage.

What You Can Expect to Learn
What You Can Expect to Learn

The Business Strategy Game is a hands-on learning exercise designed to:

Deepen your understanding of revenue-cost-profit relationships and the factors that drive profitability.

Provide an integrative, capstone experience.

Enhance your understanding of the strategies for competing successfully in globally competitive and e-commerce environments.

Provide valuable decision-making practice and help you develop good business judgment.

Gaining a Deeper Understanding of Revenue-Cost-Profit Relationships. Playing The Business Strategy Game will boost your understanding of basic revenue-cost-profit relationships and the factors that drive profitability. The what-ifing and numerical analysis that you'll find essential in operating your company in a businesslike manner will help you gain greater command of the numbers commonly found in company financial and operating reports. You'll get valuable practice in reviewing operating statistics, identifying costs that are out-of-line, comparing the profitability of different market segments, assessing your company's financial condition, and deciding on what remedial and proactive approaches to take. Since the simulation is played on personal computers, the nitty-gritty number crunching is done in a split second. You’ll be able to see the revenue-cost-profit impact of each decision entry, making it easy to explore alternative “what-if” scenarios and determine which of several different strategy options and decision combinations seems to offer the best profit potential. There’s an

Section 1: The Industry and the Company

option to construct a strategic plan and evaluate which of several longer-range strategies is more attractive. The power of having the computer instantaneously calculate the consequences of each decision will make you appreciate the importance of basing decisions on solid number-crunching analysis instead of the quicksand of "I think", "I believe", and "Maybe it will work out OK."

Consolidating Your Knowledge and Skills: An Integrative, Capstone Learning

Experience. The Business Strategy Game incorporates much of what you have studied in your production, marketing, finance, accounting, human resources, and economics courses. The company you will be managing has plants to operate, work forces to hire and pay, inventories to control, marketing and sales campaigns to wage, prices to set, a Web site and online sales channel to manage, accounting and cost data to examine, capital expenditure and investment decisions to make, shareholders to worry about, sales volumes to forecast, tariffs and exchange rate fluctuations to consider, and ups and downs in interest rates and the stock and bond markets to take into account. The simulation involves as many as 195 decision entries each period and 85 what-if entries to forecast unit sales. Wrestling with so many decision variables will not only give you a stronger understanding of how all the different functional pieces of a business fit together but also teach you the importance of looking at decisions from a total- company perspective and unifying decisions in a variety of functional areas to create a cohesive strategic action plan. You'll see why and how decisions made in one area spill over to affect outcomes in other areas of the company. The simulation is very much a capstone learning experience that ties together the information and analytical tools covered in earlier courses.

Understanding the Functioning of Globally Competitive Markets and the

Economics of E-tailing. The Business Strategy Game will give you much deeper insight into the ins and outs of global competition, the different strategies companies can pursue in world markets, and the challenges of competing in a global market environment. We have designed The Business Strategy Game to be as realistic and as faithful to the functioning of a worldwide competitive market as a computerized simulation exercise can be. The game brings into play many of the business issues and competitive conditions characteristic of today's global markets. Your company will have to contend with exchange rate fluctuations, tariff barriers, and cross-country production cost differences. You will have to decide whether to locate plants where wage rates are low or whether to avoid import tariffs by having a production base in each primary geographic market. You will have to decide whether to use much the same competitive strategy worldwide or whether to customize your strategy to specific conditions in the North American, European, Latin American, and Asian markets. Furthermore, you’ll be able to experiment with the use of a “bricks-and-clicks” e-tailing strategy—the company you’ll be managing has recently begun selling its products online.

Learning to Make Sound Decisions and to Exercise Good Business Judgment.

The Business Strategy Game will give you valuable decision-making practice and help you learn to exercise good business judgment. The simulation involves as many as 195 decision entries each period and 85 what-if entries to forecast unit sales. Dealing with so many decision variables and business issues simultaneously will not only give you a stronger understanding of how all the different functional pieces of a business fit

together, but also cause you to appreciate the

value of making decisions from a

companywide perspective. In making the strategic and operating decisions that arise in the simulation, you and your co-managers will encounter an array of fairly typical business issues and decision situations. You’ll have to assess changing industry and

Section 1: The Industry and the Company

competitive conditions, diagnose the strategies of competitors and anticipate their next moves, pursue ways to secure a competitive advantage, evaluate different courses of action, chart a strategic course for your company to take, and adjust strategic plans in response to changing conditions. There will be ample opportunities to gain proficiency in using the concepts and tools of strategic analysis. You will learn what it means to "think strategically" about a company's competitive market position and the kinds of actions it will take to improve it. As your skills in "market-watching" and "competitor- watching" get sharper, your sense of business judgment about how to strengthen a company's competitive position and financial performance will improve. You will get to test your ideas about how to run a company, and there will be prompt feedback on the caliber of your decisions.

Preparing You for the Game of Business in Real Life and Stimulating Your

Competitive Spirit. In sum, playing The Business Strategy Game will draw together the lessons and information of prior courses, build your confidence in analyzing the revenue-cost-profit economics of a business, help you understand how the functional pieces of a business fit together, give you valuable practice in crafting profitable growth strategies, and sharpen your business judgment. You will gain needed experience and practice in assessing business risk, analyzing industry and competitive conditions, making decisions from a companywide perspective, thinking strategically about a company's situation and future prospects, developing strategies and revising them in light of changing conditions, and applying what you have learned in business school. The bottom line is that playing The Business Strategy Game will make you better prepared for playing the game of business in real life. We predict that in the process your competitive spirit will be stimulated and that you will have a lot of fun.

The Company You Will Manage
The Company You Will Manage

Your company began footwear manufacturing operations ten years ago in a converted two-story warehouse in Cincinnati using makeshift equipment. John Delgaudio, Richard Tebo, and Sam Ruggles—the three co-founders—developed a modestly innovative line of athletic footwear and then proceeded over the next ten years to transform their fledgling Ohio-based enterprise into an $100 million public company with budding opportunities in the global market for athletic-style shoes. The company has two plants—a 1 million pair per year plant outside San Antonio and a new state-of-the- art Asian plant that can turn out 3 million pairs annually. Distribution warehouses have been opened in the United States (in Memphis, Tennessee), in Europe (Brussels, Belgium), and in Asia (Singapore) to serve the world's three biggest geographic markets. The company's stock price has risen from $5.00 in Year 7, when the company went public, to $15 at the end of Year 10. The stock is traded in the over-the-counter market (NASDAQ); there are 6 million shares of the company's stock outstanding.

The company was founded 10 years ago by John Delgaudio, Richard Tebo, and Sam Ruggles to manufacture and market running and jogging shoes. John and Richard had tried various brands of shoes while members of the track team at a well-known mid- western university. Both had experienced shoe-related difficulties of one sort or another and felt that no company made shoes that provided good foot protection and that performed well under the conditions encountered in cross country running and in long-distance marathons run on hard pavement. Long discussions about what they were going to do after graduation led them to think about forming a small company of their own to develop and market a new-style shoe line with features that would be welcomed by runners and serious joggers.

Section 1: The Industry and the Company

John's father had been a manufacturer's representative for one of the traditional athletic equipment companies ever since John was in the second grade. When John and Richard began to talk in earnest about starting their own athletic shoe company, John's father arranged for John and Richard to spend a day touring one of the New England shoe plants affiliated with the athletic equipment manufacturer he represented. During the tour, John and Richard met Sam Ruggles, who at age 32 had risen quickly through the ranks to become plant manager. Sam had a degree in mechanical engineering and was fascinated with machinery and the technical manufacturing aspects of the athletic footwear-making process. The three young men hit it off well together, and John and Richard immediately decided to invite Sam to join them in exploring the possibility of setting up their own company.

Two months after John and Richard graduated, plans for the new company were in high gear. Hours of brainstorming and intensive study of shoes then on the market produced three shoe designs with features no other manufacturer had. One feature involved a special air cushion sole, another involved the use of a waterproof fabric that breathed and wicked away foot perspiration, and a third involved a new type of heel support. Sam's technical know-how proved invaluable in drawing up designs and figuring out how to manufacture the shoes. Meanwhile, John located a building on the outskirts of Cincinnati that was being vacated and some used manufacturing equipment in reasonably good condition, all of which could be leased for $7,500 per month with an option to buy. The three partners contributed $50,000 in equity capital and secured a $100,000 loan from Richard Tebo’s well-to-do parents.

The First Five Years. The company was formally incorporated in August, with each founder having a one-third ownership. John Delgaudio functioned in the role of president and handled the financial and administrative chores; Richard Tebo took charge of the distribution and sales functions; and Sam Ruggles assumed responsibility for product design, purchasing, and manufacturing operations. The first pair of shoes rolled off the production line in mid-October, and the first shipment to a retail dealer was personally delivered by Richard Tebo in time for the Christmas shopping season.

The first two years were a struggle—long hours were spent testing various features and types of materials, perfecting shoe designs for different activities (jogging, walking, tennis, and aerobics), working the bugs out of the makeshift equipment and plant setup, demonstrating the shoes to dealers, and convincing dealers to handle the company's shoe line. Hundreds of pairs were given away free to high school athletes to try; Tebo spent many hours listening to user reactions and monitoring how well the shoes held up under wear and tear. The company lost money in its first year and had to use nearly $92,000 of the $100,000 loan extended by Richard Tebo's parents. But the shoes coming off the assembly line were looking better, manufacturing efficiency was improving, and reaction to the company's shoes was positive. In the second year of operation, the company sold a total of 28,000 pairs and revenues topped $500,000. Most of the sales were to independent retail dealers in the southern Ohio and northern Kentucky areas. Richard Tebo's persistence in calling on these dealers frequently, explaining the features of the shoe models to them, and even assisting the store clerks in selling customers on the shoes was a big factor in giving the company a market toehold.

In the company's third year of operation, cash flows improved and the company's financial status grew less precarious. Pairs sold topped 150,000 and revenues surpassed the $3 million mark. The founders plowed all their profits back into the business, concentrating on designing more models and broadening geographic distribution. As teenagers and young adults began to wear athletic-style shoes for everyday, walking-around purposes, the company started marketing to retail shoe

Section 1: The Industry and the Company

stores as well as sporting goods and athletic apparel stores. A line of walking shoes for men and women was introduced.

By the company's fourth year of operation, market demand for athletic footwear started to take off in the United States and Europe. The rising price of leather shoes made fabric shoes an attractive money-saving option. At the same time, dress styles were becoming more casual among adults, and more people of all ages were taking up jogging, walking, aerobics, and regular exercise. Athletic footwear became a standard item in people's personal wardrobes. A comfortable casual-wear line of shoes for men, women, and children was introduced. In Year 5, demand for the company's brand jumped to 475,000 pairs and revenues rose to $17 million. Meanwhile, to accommodate rising sales and improve production efficiency, the decision was made to relocate the company’s production facilities to the outskirts of San Antonio, Texas, where a then state-of-the-art 1 million-pair plant was constructed at a cost of $20 million and financed largely with long-term debt. The co-founders saw San Antonio as an attractive plant location because of the ready availability of nonunion labor and the strong work ethic of area residents. A central distribution center was leased in Memphis, Tennessee, to handle all shipments to retail dealers in North America.

The Second Five Years. Over the last five years, the company’s footwear sales

have expanded fivefold to almost 2.5 million pairs; revenues for Year 10 totaled $99.3

million. To achieve this growth, the company took

some aggressive steps. The

company leased a warehouse in Brussels, Belgium, to handle distribution of the company's brands throughout the European Community; sales to European retailers began late in Year 6, eight months after the San Antonio plant came on line. In Year 8, the co-founders decided to expand again, this time opting to construct a 1 million-pair plant with state-of-the-art manufacturing equipment in Asia, where the majority of the world’s athletic footwear was being produced. Asia had become the world’s most popular place to manufacture athletic footwear in the 1990s because the region’s lower wage rates, coupled with good labor productivity, greatly reduced labor costs per pair produced (as compared to footwear plants in North America and much of Europe). Also in Year 8 the company began to supply private-label athletic footwear to such North American retail chains as Sears, JC Penney, Wal-Mart, and Kmart on a competitive bid basis; the company used the Memphis warehouse to handle shipments to private-label customers.

A distribution center in Singapore was opened to handle sales to dealers in Japan, South Korea, China, Taiwan, Hong Kong, Indochina, Malaysia, Australia, New Zealand, and other countries in Southeast Asia; sales to dealers in the Asian Pacific began on a small scale in Year 8 and accelerated in Year 9. To accommodate rising demand, the Asian plant was expanded to 3 million pairs per year in Year 9.

To finance the company's rapid expansion program, the company went public in

Year 7; 2 million shares were sold to outside investors at a net of $5.00 each.

An

additional 1 million shares were issued early in Year 9 to help finance expansion into Asia and to provide needed working capital. The co-founders own a combined 3 million shares, giving the company a total of 6 million shares of stock outstanding. The stock sale proceeds, along with a $17 million bond issue in Year 7 and another $13 million bond issue in Year 9, were used to finance construction and expansion of the Asian plant and launch the start-up of the company’s Web site.

Exhibit 1-1 summarizes the company's performance for Years 6 through 10—all figures are in thousands except for earnings per share and dividends per share. As you can see, the company's growth has been profitable. Earnings per share have risen at a

Section 1: The Industry and the Company

brisk clip, from $0.41 in Year 7 to $1.50 in Year 10. Return on net investment (ROI) is a respectable 14.4%, down a little from the previous year. The company is in good financial shape and has a strong BBB bond rating on its three outstanding bond issues.

Exhibit 1-1 Company Performance Summary, Years 6- Year 6 Year 7 Year 8 Year 9 Year
Exhibit 1-1
Company Performance Summary, Years 6-
Year 6
Year 7
Year 8
Year 9
Year
10
Income Statement Summary:
Sales Revenues
Branded
$31,95
$41,66
$55,19
$68,64
$83,58
8
2
4
0
0
Private-Label
4,990
9,012
9,485
14,170
17,000
Total
36,948
50,675
64,679
82,810
100,58
0
Operating Costs – Manufacturing
Warehouse
Marketing
Administrative
Total
25,987
34,094
43,706
50,433
52,909
4,034
5,079
6,318
10,407
12,589
2,063
2,913
3,624
6,081
12,492
1,556
2,169
2,328
2,500
3,900
33,641
44,256
55,976
69,420
81,890
Operating Profit (Loss)
Interest Income (Expense)
Income (Loss) Before Taxes
Income Taxes
Net Income (Loss)
3,307
6,419
8,703
13,390
18,690
(347)
(1,774)
(1,584)
(2,702)
(5,833)
2,960
4,645
7,119
10,687
12,857
888
1,394
2,136
3,206
3,857
$2,072
$3,252
$4,983
$7,481
9,000
Financial Performance Summary:
Ending Cash Balance
Total Assets
$1,954
$2,874
$1,397
$311
$33
44,785
46,960
65,208
69,242
108,68
2
Net Investment in Property, Plant,
and Equipment
Long-Term Debt
Total Liabilities
Total Stockholders’ Equity
19,500
24,650
49,000
61,000
78,000
20,000
35,000
33,000
42,300
50,000
20,359
19,283
33,297
31,850
55,880
$24,42
$27,67
$31,91
$37,39
$52,80
6
7
1
2
2
Shares of Stock Outstanding
Earnings Per Share
Dividends Per Share
Return On Investment (ROI)
Operating Profit Margin
After-Tax Profit Margin
Debt-To-Asset Ratio
Times-Interest-Earned
Bond Rating
Year-End Stock Price
5,000
5,000
5,000
6,000
6,000
$0.41
$0.65
$1.00
$1.25
$1.50
$0.00
$0.00
$0.15
$0.20
$0.40
5.7%
11.3%
10.7%
15.5%
14.4%
8.9%
12.7%
13.5%
16.2%
18.6%
5.6%
6.4%
7.7%
9.0%
9.1%
0.45
0.75
0.51
0.61
0.46
3.62
5.49
4.96
3.20
BB
A
BBB
BBB
$6.38
$8.87
$12.25
$15.00

The three co-founders have now decided to withdraw from active management of the company. While they will remain on the Board of Directors and retain their stock ownership (1 million shares each), they are turning decision-making control over to a

Section 1: The Industry and the Company

new management team. Despite having done a creditable job of creating an innovative line of running, jogging, walking, and casual wear shoes; getting the new Asian plant operational; and launching international sales, they are uncertain what long-term strategy the company should now employ to enhance its competitive standing in the world footwear industry. Their indecision has prompted them to seek new management to run the company and decide what strategic course to pursue.

What the Board of Directors Expects
What the Board of Directors Expects

The Board of Directors has chosen you to become one of the company’s new senior executives. The company’s new management team will likely consist of three to five people, as determined by your instructor/game administrator. You and your co- managers will head the company over the next several years. Each decision period in The Business Strategy Game represents a year. Your management team will be asked to make anywhere from 6 to 10 complete sets of decisions. That means you will be in charge of the company for 6 to 10 years—long enough to test your strategy-making and strategy-implementing skills and accomplish the other learning objectives. Since the company has been in business for 10 years, you and your co-managers will take over all decision-making responsibility beginning in Year 11.

The co-founders and board members believe that the company is now reasonably well situated to capitalize on growth opportunities in North America, Europe, Latin America, and Asia (Australia, New Zealand, China, Japan, South Korea, and other Pacific Rim countries). And the company’s new Web site provides the capability to make online sales and ship orders to consumers anywhere in the world.

The company’s Board of Directors has charged you and your co-managers with developing a strategic vision for the company and crafting a long-term strategy that will produce the following results:

Enhance the company’s reputation and competitive standing in the industry. Grow earnings per share and produce an acceptable return on shareholder investment. Build shareholder value via a rising stock price and perhaps higher dividends. Preserve the company’s financial integrity and bond rating.

The Board of Directors has given you and your co-managers broad authority to implement whatever strategic actions and operating changes you deem appropriate. You have only two constraints.

You may not merge with another company in the industry—the Board wishes the company to remain independent.

You

are

expected

to

comply

fully

with

all

legislative

and

regulatory

requirements and conduct the company’s business in an ethical manner.

How Your Company’s Performance Will Be Judged. Your company’s performance will be tracked annually and evaluated in relation to the performance of rival footwear companies. Six performance measures will be used to determine how well your company is doing:

Growth in revenues. Growth in earnings per share above the present level of $1.50 per share.

Section 1: The Industry and the Company

Return on investment (ROI).

Market capitalization or market value of your company (defined as your

company’s

current

outstanding). Bond rating. Strategy rating.

stock

price

multiplied

by

the

number

of

shares

A weighted average of these six performance measures will be used to calculate an overall performance score both annually and all years played to date. The weights on these six performance measures will be announced at the beginning of the simulation.

The Industry and Competitive Environment
The Industry and Competitive Environment

Your company will compete in a global market arena consisting of between 5 and 16 companies—the exact number of competing companies will be announced by your instructor/game administrator at the start of the simulation. All companies begin the simulation in precisely the same position—with equal sales, profits, plant capacity, inventories, prices, costs, product quality, marketing effort, and so on. The five-year operating history of each company in the industry is the same as that shown for your company in Exhibit 1-1. Every company in the industry is in sound financial condition and, so far, has competed successfully.

The prospects for long-term industry-wide growth in footwear sales are excellent. Athletic shoes have become the everyday footwear of choice for children and teenagers. Adults use athletic shoes for exercise and recreational activities. Many adults are wearing them for leisure and casual use, attracted by the lower prices in comparison to leather shoes, the greater comfort, and the easy-care features. The comfort aspects of athletic shoes have proved very attractive to people who spend a lot of time on their feet and to older people with foot problems. The combined effect of these factors is projected to generate strong market growth in all four major geographic markets over the next five years (Years 11 - 15):

Projected Annual Growth in Pairs Demanded, Years 11 - 15

North America

Asia

Europe

Latin America

5%-20%

15%-35%

10%-25%

15%-35%

The lower projected growth for the North American market is due to the fact that a sizable fraction of North American consumers have already purchased one or more pairs of athletic shoes, thus making sales more a function of replacement demand than first- time purchases. A more definite five-year demand forecast for the industry is being prepared and will be published in the Footwear Industry Report, a copy of which you will receive at the end of each year (beginning in Year 11).

Customers and Distribution Channels
Customers and Distribution Channels

Athletic footwear manufacturers can use any of four distribution channels to access the ultimate consumers of athletic footwear, the people who wear the shoes:

Section 1: The Industry and the Company

Independent footwear retailers who carry athletic footwear—department stores, retail shoe stores, sporting goods stores, and pro shops at golf and tennis clubs.

Company-owned and operated retail “megastores.”

Online sales at the company’s Web site.

Private-label sales to North American chain store accounts.

All manufacturers have traditionally relied heavily on independent footwear retailers as their primary distribution channel for sales of footwear carrying the company’s own brand. Manufacturers built a network of retailers to handle their brand in all geographic areas where they marketed. Retailers are recruited and serviced by independent sales representatives (sometimes called manufacturer's representatives). Each company has

manufacturer’s reps to handle its product line exclusively in each geographic market. Their role is to call on retailers, convince them of the merits to carrying the company's brand of footwear, assist them with merchandising and in-store displays, and solicit orders. Manufacturers gain consumer awareness of their brands via in-store displays of

retailers, media advertising, and word-of-mouth.

Some independent retailers carry a

limited number of the company models and styles; others carry close to the whole line.

The typical independent footwear retailer sells name brand shoes at a price that is double the wholesale price of manufacturers. However, mounting use of the Internet by shoppers has prompted all manufacturers to launch a Web site displaying all their models and styles and giving online shoppers the option to purchase footwear online at “introductory” prices which so far have run about $25 per pair below the standard retail price.

While no manufacturer has yet done so, most are looking closely at the merits of opening two-level 14,000 square-foot company-operated “megastores” in shopping centers or malls where shoppers can peruse the company’s entire product line and even try them out on a miniature running track and/or basketball court. These “megastores” can enhance the company’s brand visibility with consumers as compared to relying on independent retailers of athletic footwear who typically carry several different brands and other types of footwear.

In the North American market only, there's a fourth distribution channel—private- label sales to large chain store accounts. Certain chains prefer to sell athletic footwear under their own label at prices roughly 20% below the suggested retail prices of manufacturers' name brands. All these chains buy their private-label footwear from manufacturers on a competitive-bid basis, subject to specifications of minimum product quality and product variety.

Customer demand for athletic footwear is diverse in terms of price, quality, and types of models. There are customers who are satisfied with no frills budget-priced shoes and there are customers who are quite willing to pay premium prices for top-of- the-line quality, multiple features, and fashionable styling. The biggest market segment consists of customers who buy athletic shoes for general wear, but there are sizable buyer segments for specialty shoes designed expressly for tennis, golf, jogging, aerobics, basketball, soccer, bowling, and so on. The diversity of buyer demand gives manufacturers room to pursue a variety of strategies—from competing across-the-board with many models and below-average prices to making a limited number of styles for buyers willing to pay premium prices for top-of-the-line quality.

Section 1: The Industry and the Company

Raw Materials Supplies
Raw Materials Supplies

All of the materials used in producing athletic footwear are readily available on the open market. There are some 300 different suppliers worldwide who have the capability to furnish interior lining fabrics, waterproof fabrics and plastics for external use, rubber and plastic materials for soles, shoelaces, and high-strength thread. It is substantially cheaper for footwear manufacturers to purchase these materials from outside suppliers than it is to manufacture them internally in the relatively small volumes needed. Delivery time on all materials is a matter of no more than 48 hours, allowing manufacturers to operate on a just-in-time delivery basis.

Suppliers offer two basic grades of raw materials: normal-wear and long-wear. The use of long-wear fabrics and shoe sole materials improves shoe quality and

performance, but they currently cost two-thirds more than normal-wear components. Materials for a shoe made completely of long-wear components cost $15 per pair versus a cost of $9 per pair for shoes made entirely of normal-wear components. However,

shoes can be manufactured with any percentage combination of normal-wear and

long-wear materials. All footwear-making equipment in present and future plants will accommodate a mixture of normal-wear and long-wear components.

All materials suppliers charge the going market price, and the qualities of long-wear and normal-wear materials are the same from supplier to supplier. Materials prices fluctuate according to worldwide supply-demand conditions. Whenever worldwide shoe production falls below 90% of the footwear industry's worldwide plant capacity (not counting overtime production capability), the market

Materials prices fluctuate according to worldwide utilization of plant capacity and the percentage use of long-wear
Materials prices
fluctuate according to
worldwide utilization of
plant capacity and the
percentage use of
long-wear materials.

prices for both normal and long-wear materials drop 1% for each 1% below the 90% capacity utilization level.

Such price reductions reflect weak demand and increased competition among materials suppliers for the available orders. Conversely, whenever worldwide shoe

production exceeds 100% of worldwide plant capacity utilization (meaning that companies, on average, are pro- ducing at overtime), the market prices for normal and long-wear materials rise 1%

for each 1% that worldwide capacity utilization exceeds 100%. Such price increases reflect strong demand for materials and greater ability on the part of suppliers to get away with charging more for essential raw materials.

A second demand-supply condition causing materials prices to change is

widespread substitution of long-wear materials for normal-wear materials. Once global usage of long-wear materials passes the 25% level, the prices of long-wear materials rise 0.5% for each 1% that the percentage use of long-wear materials exceeds 25%;

simultaneously, the worldwide market price of normal-wear materials will fall 0.5% for each 1% that the global usage of normal-wear materials falls below 75%. Thus the price gap between long-wear and normal-wear materials widens as global use of long-wear materials rises above 25%.

Despite price fluctuations, materials suppliers have ample capacity to furnish whatever volume of materials that manufacturers need. No shortages have occurred in the past. Just recently, suppliers indicated they would have no difficulty in accommodating increased materials demand in the event footwear-makers build additional plant capacity to meet the growing demand for athletic-style shoes.

Section 1: The Industry and the Company

Footwear manufacturers are thus assured of receiving all orders for normal-wear and long-wear materials no matter how much new footwear capacity is built down the road.

Manufacturing
Manufacturing

Footwear manufacturing has evolved into a rather uncomplicated process, and the technology has matured to the point where it is well understood throughout the industry. At present, no company has proprietary know-how that translates into manufacturing advantage. The production process consists of cutting fabrics and materials to conform to size and design patterns, stitching the various pieces of the shoe top together, molding and gluing the shoe soles, binding the shoe top to the sole, and inserting the innersole and laces. Tasks are divided among production workers in such a manner that it is easy to measure individual worker output and thus create incentive compensation tied to piecework. Labor productivity is determined more by worker dexterity and effort than by machine speed; this is why piecework incentives can induce greater output per worker. On the other hand, there is ample room for worker error; unless workers pay careful attention to detail, the quality of workmanship in the final product suffers. Quality control procedures at each step of the process are essential to minimizing the reject rates on pairs produced.

Studies have shown that assembly lines are most efficient producing only one

model at a time,

though it is easy to produce different sizes of the same model

simultaneously. To switch production over from one model to another takes several

A plant may be operated at overtime, producing up to a maximum of 20% above normal
A plant may be
operated at overtime,
producing up to a
maximum of 20%
above normal annual
production capacity.

hours of set-up time and usually is done between shifts. Machine maintenance is also done between regular work shifts. There is sufficient time after allowing for

maintenance and production setup for different models to

accommodate overtime production up to 20% of normal production capacity. Thus a plant capable of producing 1

million pairs annually with a normal 40-hour workweek can turn out 1.2 million pairs annually with the maximum 20% use of overtime.

Industry observers are predicting that companies will take a hard look at the economics of producing a bigger fraction of athletic shoes in Asian and Latin American countries where trainable supplies of low-wage labor are readily available. Wages and benefits for Asian and Latin American workers start at $2,500 annually compared to $12,000 in Europe and $18,000 or more in North America. The basic shoe-making abilities of workers in Asia, Europe, and Latin America are roughly equal since only modest labor skills are needed and training periods for workers are short. However, worker productivity levels at different plants can vary substantially due to the use of different incentive compensation plans, different production methods, and different plant automation options.

Weapons of Competitive Rivalry
Weapons of Competitive Rivalry

Competition among footwear producers centers around 11 sales-determining variables: (1) wholesale selling price, (2) product quality, (3) use of customer rebates, (4) product line breadth, (5) advertising, (6) celebrity endorsements and brand image, (7) the number of independent retail outlets handling each company's brand, (8) the caliber of customer service provided to retail outlets, (9) the number of retail megastores that various companies have, (10) the effectiveness of the company’s

Section 1: The Industry and the Company

online sales effort at the company’s Web site, and (11) customer loyalty. Each company's market share in a given geographic area (North America, Europe, Asia, Latin America) depends on how its combined use of the 11 competitive weapons stacks up against the competitive effort of other companies competing in the same region. The stronger a company's overall competitive effort is relative to rival companies, the more pairs the company will sell and the larger its market share in that geographic region will be (provided, of course, that it has produced and shipped enough pairs to meet regional demand).

You’ll find it essential to compete effectively against rivals—varying your prices, product quality, advertising, product line breadth, and so on—to capture a profitable market share and produce good bottom-line performance. We’ll explain the role and impact of each of the 11 weapons of competitive rivalry in the next section. But what you should understand and appreciate fully here is that The Business Strategy Game is an interactive exercise; the competitive atmosphere that prevails is determined entirely by the interplay among your company’s decisions and those of rivals companies—not by the computer software or by your instructor. Your company’s revenues and market share will depend on how your company's competitive effort stacks up against the efforts of rivals. Since it is safe to assume that rival companies will try to outmaneuver and out-compete your company, you and your co-managers will have to watch competitors' actions closely and try to anticipate their moves when developing your company's strategy and making decisions. You will have to stay on top of changing market conditions, try to avoid being outmaneuvered and put into a competitive bind by the actions of rival companies, and make sure your footwear products are attractively priced and competitively marketed. How well your company performs will depend on how the caliber of your company's strategies and operating decisions stack up against the caliber of the strategies and decisions of rival companies.

At present, the company has no sharply defined strategy for competing. It charges an average price for its footwear, has an average quality product, provides an average level of service to retailers, has an average number of models for customers to select from, and has built an average brand name image via its advertising, retailer network, and rebate efforts. In other words, the company's shoes are not presently differentiated from those of rivals. Costs per pair are on a par with other rivals—the company is neither a low-cost producer nor a high-cost producer. The company is viewed as a "middle-of-the-road" competitor that is trying to participate across-the-board in all four segments of the world footwear market. The company has an average market share.

Closely related to the issue of how to become a more effective competitor is the issue of how to position the company's products in the global marketplace. Prior management was unsure whether the company should pursue

Most any prudent business strategy has potential for suc- ceeding; there is no built-in favoritism shown
Most any prudent
business strategy
has potential for suc-
ceeding; there is no
built-in favoritism
shown to one
strategy over

both the branded and private-label segments and whether it made sense to strive for market leadership in North America, Europe, Asia, and Latin America simultaneously. And in trying to broaden the company's geographic market base, prior management was unsure whether the company should produce essentially the

same quality shoes for all market segments or whether to make high quality shoes for one or two markets and low- quality shoes for the others. You and your co-managers will have the latitude to pursue a low-cost/low-price strategy in one market arena and a high quality/premium price/strong brand image strategy in another market arena should you choose to do so.

Section 1: The Industry and the Company

You and your co-managers have the authority to pursue whatever business strategy you wish and to revise it as needed. The Business Strategy Game provides great leeway in crafting strategy, with no built-in favoritism shown to one strategy over another. Most any prudent business strategy has potential for succeeding, provided it is not overpowered by the actions and strategies of rival companies.

Overview of The Business Strategy Game
Overview of The Business Strategy Game

You play the simulation by entering your decisions on a series of decision screens. The computer software is programmed to instantly calculate the impact of each decision on key outcome measures and show you the results in an area on the screen below the decision entries. This “instant calc” feature of the software allows you to see the incremental effect of each decision and provides you with information to judge whether to stick with or change the decision entry. You’ll discover that the software design of The Business Strategy Game provides you with powerful decision-making and what- ifing tools with which to explore the merits of alternative courses of action and arrive at a satisfactory plan for managing the company. When you start work on your decisions, be aggressive in experimenting with a variety of different decision entries and decision combinations. The more that you and your co-managers try out different decisions and observe the different projected outcomes that appear in the calculations section below the decision entries on the screen, the quicker you will come to understand the interconnections among the various decisions and arrive at an acceptable combination of decision entries. No entry is final until you give your Company Data Disk containing your decisions to the instructor/game administrator.

After each year's decisions are "processed," you will receive an assortment of reports detailing how your company fared. These reports include financial statements, cost analysis breakdowns, and reports concerning plant operations, warehouse and shipping operations, and sales and marketing activities. In addition, you will receive three reports containing information about the industry and about competitors. The company and industry reports provide information essential in assessing the results of the past year and developing next year's strategy and decisions.

Obtaining and Running the Company he 7 Edition of The Business Strategy Game marks the beginning
Obtaining and Running the Company
Obtaining and
Running the
Company
Obtaining and Running the Company he 7 Edition of The Business Strategy Game marks the beginning

he 7 th Edition of The Business Strategy Game marks the beginning of the Internet

era in delivering the simulation software to users. We believe use of the Internet

will simplify and enhance your experience with The Business Strategy Game.

This

section of the Player’s Manual leads you step-by-step through the following technical

aspects of the simulation:

Obtaining the Company Program—In the event you will not be playing the simulation on a PC in a computer lab setting where the program software is already installed, you can acquire the needed software by downloading it from the Web site.

Installing the Company Program—The setup program that you download from the Web site is quick and easy to run.

Creating a Company Disk—All of your company information is stored on a floppy disk for easy transfer to your instructor/game administrator. You will need a blank 3_ inch floppy disk with a label.

Running the Company Program—A simple, yet powerful, point-and-click design makes running the software a breeze. You’ll find the software intuitive and easy to navigate—your biggest challenge will be how to deal with crafty competitors rather than how to master use of the software.

Section 2: Obtaining and Running the Company Program

Obtaining the Company Program
Obtaining the Company Program

When you purchased this copy of The Business Strategy Game Player’s Manual, you also purchased the right to download the BSG Company Program free of charge from the BSG Web site. Affixed to the inside cover of this manual is a label baring your personal Download Code. The easy-to-follow instructions on the label lead you through the download procedure.

The Download Code. When you go to download the Company Program from the BSG Web site, you will be asked to provide your Download Code. Once the download of the program software is completed, your Download Code is automatically deact-

ivated. Your Download Code can be used to download the BSG Company Program one time only—so be sure to download the software to the PC that you will be using regularly to play the simulation. If, later on, you should have occasion to download the BSG Company Program a second time, then you will need to see your instructor or game administrator for instructions on how to proceed.

Re-Sale of this Manual.

Should you re-sell this copy of the Player’s Manual to

another student or to a book store, it is your responsibility to provide the buyer with

your copy of the BSG software you have downloaded. A buyer of a used Player’s Manual cannot download the latest BSG Company Program from our Web site because the Download Code for this manual will have been used by the original purchaser.

Installing the Company Program
Installing the Company Program

Many of you will be playing The Business Strategy Game in a computer lab setting where the basic program software has already been installed on the PCs in the lab. If so, you can skip this section and move on to the section describing use of the Company Disk. If, however, you want to install the program software to your own PC, then you need to be aware of the following system requirements:

Operating System ...

Windows

95, 98, NT, or 2000

Microsoft Excel 2000 (recommended); or Microsoft Excel 97 (some minor functional limitations may be experienced with use of this earlier version)

Microprocessor.......233

MHz or faster

Memory ....................

  • 64 megabytes of RAM (recommended); 48 megabytes

of RAM (minimum)

Hard Disk

Space.....5

Printer.......................A

megabytes Windows-compatible printer is recommended

to

optimize your use of the simulation exercise.

Setting Up the Company Program on Your PC. The download file from the BSG Web

site is an executable setup program designed to quickly and easily install and set up the

BSG Company Program on your PC. To execute the setup program

you have

downloaded, click Start and choose Run from your Windows Start Menu. Then type the path (where you downloaded the file to) and the file name and click Ok. For example, if you downloaded the file to your C:\My Documents folder, you would enter the following command line in the run box:

Section 2: Obtaining and Running the Company Program

Section 2: Obtaining and Running the Company Program Follow the directions that appear on the screen

Follow the directions that appear on the screen and in a very short time The Business Strategy Game Company Program will be installed on your PC.

Creating a Company Disk
Creating a Company Disk

The Business Strategy Game consists of two separate and distinct software elements: 1) the Company Program (which is installed to the hard drive of your PC or the PCs in the computer lab), and 2) files containing specific data for your company. Your company’s data consists of decision entry files (manufacturing, labor, shipping, marketing, and finance decision entries that you make each year), company report files (income statement data, balance sheet data, cash flow data, etc.), and industry data files. All of these company data files are stored in a location separate from the Company Program. Typically, your company’s data will be stored on a 3_-inch floppy disk called the Company Disk. After you have set up the Company Program on your PC, you will be prompted with a query as to whether you want to create your Company Disk. If so, you will need to insert a blank 3_-inch floppy disk, and the Setup Program will copy all of the necessary data files onto it. If you do not have a blank floppy handy, you can come back later and create your Company Disk. (A few of you may be playing the simulation on networked computers in a computer lab setting where use of a Company Disk is unnecessary—if this is the case, your instructor/game administrator will provide you with the details and procedures. However, even here, if you want to have the capability to utilize your own PC in playing the simulation, you will need to create a Company Disk to transfer your data between PCs.)

You will need a label for your Company Disk that indicates your Industry Number (provided by your instructor/game administrator), your company letter (also provided by your instructor/game administrator). Should you inadvertently lose your Company Disk or if gets damaged before making your first set of decisions and receiving the results back from your instructor/game administrator, you can create a replacement disk by simply running the Setup Program again. Remember that the Setup Program creates a Company Disk updated through Year 10 and ready for Year 11 decision-making (the

first year of the simulation exercise). If you have already completed the Year 11 decision and are in Year 12 or beyond and you need to replace your Company Disk, then you must see your instructor or game administrator to obtain a replacement containing the latest company data files.

When to Use the Company Data Folder Option. Under most circumstances, you will use a Company Disk (3_-inch floppy) to submit your decisions on and receive results back from your instructor/game administrator. However, in distance-learning situations where you are e-mailing the decisions to your instructor/game administrator and receiving results back from your instructor/game administrator, your company data can be stored on the hard drive rather than a floppy (which will allow the program to run

Section 2: Obtaining and Running the Company Program

faster), and the Setup Program can create an appropriate data folder on your hard drive instead of a Company disk. Your annual decision entries may be delivered to your instructor/game administrator electronically via e-mail (see the e-mail menu item explained later in this section). You should use the e-mail delivery function only if directed to do so by your instructor or game administrator. If you are using the e-mail function exclusively to deliver your decisions and receive your results, then creating a data folder on your hard drive in place of a Company Disk makes sense, simply for convenience and to expedite computer processing times. However, the e-mail decision delivery and receipt function can be used if your company data is stored on a Company Disk (3_ floppy) as well as a folder on your PC’s hard drive.

Getting Started
Getting Started

Launching the Program. When you installed the BSG Company Program to your PC, the Setup Program automatically created an item on your Programs menu called Business Strategy Game 7e. To launch BSG, click Start, Programs, Business Strategy Game 7e, and BSG Company Operations. If you cannot find the Business Strategy Game 7e menu item, you can launch the BSG Company Program by clicking Start, Run, and entering C:\BSG7co\Main.xls in the run box.

When you launch BSG your Microsoft Excel program will open first, and within a few seconds the following message will appear:

Section 2: Obtaining and Running the Company Program faster), and the Setup Program can create an

You must click “Enable Macros” for the BSG program to operate properly. All of the BSG software that is available for download from the BSG web site has been thoroughly scanned for viruses, so if you downloaded your program directly from the BSG site you needn’t worry about viruses. If you acquired your BSG program from a source other than the BSG web site, we cannot guarantee its integrity or safety.

After enabling macros, The Business Strategy Game title screen will appear. Insert your Company Disk in the floppy drive and click the “Continue” button. Unless otherwise directed by your instructor/game administrator because you are playing a

“diskless version” of the simulation in a networked computer lab, your Company Disk must ALWAYS be in the floppy drive when you run The Business Strategy Game.

The First Time You Run The Business Strategy Game. The first time you run the BSG program, a “Company Identification Screen” will appear (see Exhibit 2-1). You will be asked to supply the following information:

  • 1. Your Industry Number (assigned to you by your instructor/game administrator; a number from 1 to 99).

Section 2: Obtaining and Running the Company Program

  • 2. Your Company Letter (assigned to you by your instructor/game administrator; a letter from A to P).

  • 3. Your Company Name (the first character of your company name must be the same as your assigned company letter; make sure your Company Name is not too long to fit in the space provided).

  • 4. A Ticker Symbol under which your stock will trade on the Footwear Stock Exchange (the first character of the ticker symbol must be the same as your assigned company letter).

  • 5. A Company Password (choose a password that you consider secure and yet easy to remember; BSG passwords are case-sensitive).

If you do not know your Industry Number or Company Letter (or if your instruc- tor/game administrator has not yet assigned you an Industry Number or Company Letter), click on the “Practice” button and proceed. You can come back and enter the required ID information before completing the first decision.

If you enter wrong or incomplete Company Identification information, your decision entries will not be recognized and will be rendered invalid. So be absolutely sure that your company identification information is complete and accurate before submitting your first decision to your instructor/game administrator.

Exhibit 2-1 Company Identification Screen
Exhibit 2-1
Company Identification Screen
Section 2: Obtaining and Running the Company Program 2. Your Company Letter (assigned to you by

Section 2: Obtaining and Running the Company Program

Exploring the Menu Bar
Exploring the Menu Bar

The Business Strategy Game Menu consists of a bar across the top of the screen. As shown in Exhibit 2-2, the Menu Bar Guide Screen explains each of the items found in

the Menu Bar. More than likely, you will use all of these menu items at one time or

another during the course of the simulation exercise. yourself with the Menu Bar.

Spend some time familiarizing

You will use the 10 decision buttons on the Menu Bar to forecast the demand for your company’s products and to access the decision entries for various aspects of your company’s operations. After the decisions for each year are processed, you will use the four buttons in the reports portion of the screen to view or obtain printouts of all the results for that period. You’ll find the information in these reports essential in diagnosing what happened and in making decisions for the upcoming year.

Three

of

the

four reports contain only

sample data

for Year 10 (because

all

companies had the same prices and competitive effort and the same operating results for Year 10), and will be updated after Year 11 is processed by your instructor/game administrator. Copies of these reports going into Year 11 add nothing about competitors or industry conditions beyond what is described in the next sections of this manual. The fourth menu item in the Reports portion of the Menu Bar allows you to view or print copies of the company reports for Year 10. You may find it convenient to print a copy to refer to in making Year 11 decisions; we’ll talk about the significance of the information in these reports in the upcoming sections of this manual.

Exhibit 2-2 Menu Bar Guide Screen
Exhibit 2-2
Menu Bar Guide Screen
Section 2: Obtaining and Running the Company Program Exploring the Menu Bar The Business Strategy Game

Section 2: Obtaining and Running the Company Program

The E-Mail Option
The E-Mail Option

This option uses your existing locally installed e-mail program to send the decisions you make for a given year to your instructor/game administrator. Normally, you will

use a Company Disk (3_ floppy) to submit decisions for a year, but your

Section 2: Obtaining and Running the Company Program The E-Mail Option This option uses your existing

instructor/game administrator may direct you to use the e-mail option instead. Because Excel is a Microsoft product, the e-mail option works best with Microsoft Outlook or Outlook Express

(which can be downloaded free from the Microsoft Web site). It can work with other locally installed e-mail programs as well, but it will not work with internet-based e-mail systems if they use a web browser as the e-mail interface. In order to successfully e- mail decisions to your instructor/game administrator, the

following conditions must be met:

  • 1. Your PC must be connected to the Internet.

  • 2. Your PC’s default e-mail program must be loaded and running in the background.

  • 3. The PC’s default e-mail program must be a locally installed program, not an internet-based e-mail system.

When you click the “Send” button to e-mail your decisions, the BSG program creates an Excel workbook file containing your decisions, attaches the file to an e-mail message, and sends it to your instructor. If for any reason the program cannot send the e-mail message to your instructor, you will receive a message telling you how to send the e-mail and the file attachment manually. You will just have to go through a few extra steps to achieve the same end.

Checking Your Computer’s Default E-Mailer. To determine or change your computer’s default e-mail program, click Start, Settings, and Control Panel. Double- click the Internet Options icon and select the Programs tab. The item labeled E-mail shows your computer’s default e-mail program.

Section 2: Obtaining and Running the Company Program The E-Mail Option This option uses your existing

Section 2: Obtaining and Running the Company Program

The Remaining Sections of this Manual
The Remaining Sections of this Manual

Section 3 of the Player’s Manual presents forecasts of market demand for athletic footwear in Years 11 and 12, describes the factors that determine each company’s sales volume and market share, and discusses how to forecast the demand for your company’s footwear. In Sections 4, 5, 6, and 7 of this manual, we review the decision screens, discuss the decision entries, and explain various relationships, procedures, and "rules" you need to be aware of. In Section 8 of the manual, we’ll give you some additional information about how your company’s performance will be scored, tell you about the various industry and company reports shown on the Menu Bar, and explain the strategic plan option. Section 9 discusses the procedures for making a decision and utilizing the various reports you are provided after each year’s decisions are processed.

Before trying to use the software, you should read the entire Player’s Manual, highlighting the key facts and explanations of relationships and interactions for easy future reference.

Competition and Demand efore you dig into the details of your company’s operations and what decisions
Competition and Demand
Competition and
Demand
Competition and Demand efore you dig into the details of your company’s operations and what decisions

efore you dig into the details of your company’s operations and what decisions

need to be made for the year ahead, you first need to understand the big picture of the marketplace—the industry and competitive environment in which you are going to be competing. In this section we will describe what market conditions are like as you take over the company and start to think about your strategy and decisions for Year 11. We will look specifically at footwear sales projections for the next two years, explain each of the factors that determine your company’s sales volume and market share, and describe the demand forecasting model that you can use to project unit sales in each market segment where you elect to compete.

Demand Projections for Years 11 and 12 Worldwide footwear demand is reliably forecasted to grow 16%
Demand Projections for Years 11 and 12
Worldwide footwear demand is reliably forecasted to grow 16% in Year 11 and 22%
in Year 12, with per company demand averaging 3,225,000 pairs in Year 11 and 3,950,000
pairs in Year 12. The forecasts for the five market segments are

Private-

 

Label

Branded Demand (in pairs)

 

Worldwide

Demand

North

Latin

Demand

(in pairs)

America

Asia

Europe

America

(in pairs)

Year 11

650,000

1,500,000

450,000

625,000

3,225,000

Year 12

700,000

1,650,000

575,000

725,000

300,000

3,950,000

Section 3: Competition and Demand Forecasts

To determine the overall size of the market your company will be competing for in Years
To determine the overall
size of the market your
company will be competing
for in Years 11 and 12,
multiply the forecasted
quantities per company by
the number of companies
in your industry.

Total market demand is equal to the per company projections in the previous table multiplied by the

number of companies in your industry.

Thus, if

there are 10 companies in your industry, global

market demand will be 32,225,000 million pairs in

Year 11 and 39,500,000 in Year 12.

It is quite unlikely, however, that your com- pany's actual sales in Years 11 and 12 will turn out to

be exactly equal to the company averages. How many pairs your company will actually sell in a given year always depends on how your company's overall competitive effort stacks up against

the competitive efforts of rival companies. Any company can sell substantially more than the per-company average by out-competing rival companies. Companies with attractively priced, aggressively marketed products will outsell companies having comparatively over-priced and/or under-marketed products. You will use the Demand Forecast screen (the first button in the Decisions portion of the Menu Bar—see Exhibit 2-2) to help you determine how many pairs you company will likely be able to sell, given (1) your company’s competitive effort (selling prices, product quality, brand image, advertising, and so on) and (2) your estimates of the competitive effort exerted by rival companies.

While the industry sales forecasts for Years 11 and 12 (and the updated five-year forecasts you will receive in each issue of The Footwear Industry Report) should be considered very reliable information, actual industry-wide sales in any market segment can deviate from forecasted levels for either of two reasons: (1) unforeseen changes in economic conditions and consumer spending levels and (2) unusually strong or weak competitive efforts on the part of rival companies to capture the available sales volume.

The Role of the S&P 500 Index. Past experience shows that sales of athletic footwear vary up or down from the market forecast according to changes in the worldwide level of economic activity, consumer confidence, and employment levels. An important new study shows that the sizes of the deviations from forecasted demand

correlate very closely with changes in the S&P 500 Index—a much-watched measure of the prices of the common stocks of 500 companies selected by Standard & Poor's. 1 When the S&P 500 has risen above the prior year's value, actual footwear demand industry-wide has consistently been above the forecasted amount. When the S&P 500 has dropped, footwear demand has consistently been below the projected volume. The bigger the up or down move in the S&P 500, the bigger the

The maximum effect that changes in the S&P 500 Index can have on next year's worldwide
The maximum effect
that changes in the
S&P 500 Index can
have on next year's
worldwide footwear
demand is ±10%.

deviations from forecast have been—although the forecast has never been off by more than 10%.

During the upcoming years, you should expect ups and downs in the S&P 500 Index to signal that actual

industry sales of footwear will deviate above or below the forecast. The size of the deviation from the forecasted amount depends on how much the S&P 500 Index moves above or below the value announced by the instructor/game administrator for the previous year. If the upcoming year's S&P 500 value exceeds the prior-year value, actual market demand will be larger than forecasted market demand. The bigger the gap between the current year's and the previous year's S&P 500 value, the more the actual number of pairs demanded will

1 The daily changes in the S&P 500 Index can be found on the first page of the third section of The Wall Street Journal ; it is also reported in the business section of many newspapers.

Section 3: Competition and Demand Forecasts

exceed the forecasted volume (subject to the 10% limit).

Conversely, actual market

demand will fall below the forecasted demand when the current year's S&P 500 value falls below the previous year's value. Just how big a change in the S&P 500 it takes to induce each 1% deviation from the forecasted footwear volume is still unclear, but astute company managers should be able to arrive at good estimates within a short time.

The S&P 500 Index will have no impact on the Year 11 forecast, however. The S&P

  • 500 Index value for Year 11 is the starting value; the first impact of changes in the S&P

  • 500 on forecasted sales potential comes in Year 12.

The Role of Competitive Aggressiveness. Actual industry sales of athletic shoes are also a function of how aggressively all companies as a group try to capture the projected sales volumes. A significant drop in footwear prices can stimulate buying and cause actual sales to rise above the forecasted amounts. Likewise, if companies as a group significantly boost product quality or improve customer service, then sales for the year can exceed the projected amounts. Unusually aggressive price-cutting and marketing efforts industry- wide can boost actual market volume by as much as 4% over the projected amount.

Unusually aggressive (or weak) pricing and marketing efforts industry-wide will increase (or decrease) actual sales volumes
Unusually aggressive
(or weak) pricing and
marketing efforts
industry-wide will
increase (or decrease)
actual sales volumes
above (or below)
projected amounts.

On the other hand, if average prices for footwear rise sharply or footwear quality

drops or marketing efforts are cut to minimal levels, then buyers may not be attracted to purchase as many pairs as forecasted. The weaker the industry's overall competitive effort, the greater the amount by which actual sales can fall below forecasted volumes.

All sales volume forecasts are based on the assumption that companies will exert competitive efforts comparable to Year 10 levels.

The Factors that Determine Market Share
The Factors that Determine Market Share

Competition among footwear producers centers around 11 sales-determining variables: (1) wholesale selling price, (2) product quality, (3) use of customer rebates, (4) product line breadth, (5) advertising, (6) celebrity endorsements and brand image, (7) the number of independent retail outlets handling each company's brand, (8) the caliber of customer service provided to retail outlets, (9) the number of retail megastores that various companies have, (10) the effectiveness of the company’s

online sales effort at the company’s Web site, and (11) customer loyalty. Moreover, there is a customer loyalty factor that helps each company retain the business of footwear shoppers once they elect to purchase a particular brand. Each company's market share in a given geographic area (North America, Asia, Europe, Latin America) depends on how its combined use of the 11 competitive weapons stacks up against the competitive effort of other companies competing in the same region. The stronger a company's overall competitive effort is relative to rival companies, the more pairs the company will sell and the larger its market share in that geographic region will be (provided, of course, that it has produced enough pairs to meet demand). It is essential that you understand the role and impact of each of the 11 weapons of competitive rivalry.

Wholesale Selling Price. This is the most important of the 11 sales-determining factors. The higher your company's wholesale price to independent retailers, the higher the prices that retailers charge consumers. Consumers are quite knowledgeable about

Section 3: Competition and Demand Forecasts

the retail prices of different brands, and many do comparison shopping on price before

settling upon a brand to purchase. If your company's wholesale price in a geographic area is above the industry average in that area, some

Wholesale selling price is the most important competitive factor in the branded footwear markets.
Wholesale selling
price is the most
important competitive
factor in the branded
footwear markets.

shoppers who otherwise are attracted to your brand will switch to lower-priced brands. The more your company's

wholesale selling price is above the geographic average of all competitors, the lower your company’s market share

will tend to be. However, a higher-than-average selling price can be partially or wholly offset by a combination of higher product quality, better service to independent retailers, extra advertising, bigger customer rebates, the use of celebrity endorsements, the addition of more models to your company's product line, a more aggressive online sales effort, and a larger network of retail outlets and retail megastores. But the further your company's prices are above the industry average, the harder it is to overcome buyer resistance to a higher price and avoid a loss in market share.

Conversely, charging a wholesale price to retailers that is below the geographic market average of all competitors enhances the attractiveness of your company's brand, especially in the eyes of price-conscious shoppers, and can lead to market share gains at competitors' expense. The deeper the price cuts, the greater the potential sales gains unless the effects of a lower price are negated by sub-par quality, comparatively few models/styles for buyers to choose among, insufficient advertising, the absence of celebrity endorsements, and a network of retail outlets. Low price alone is generally not sufficient for capturing a big market share. Moreover, higher-priced rivals can offer customer rebates to dampen the market share losses to lower-priced rivals offering no rebates or lesser rebates.

In the private-label segment of the North American market, chain stores specify minimum quality standards and model variety for footwear-makers to meet and then buy strictly on the basis of which manufacturers bid the lowest prices.

Product Quality. The quality of shoes produced at each plant is a function of four factors: (1) the percentage of long-wear materials used, (2) current-year expenditures for quality control per pair produced, (3) cumulative expenditures for quality control per pair produced (to reflect learning and experience curve effects), and (4) the amount spent per model for new features and styling. Efforts to boost quality by incorporating a progressively greater percentage of long-wear materials or by spending progressively greater amounts on quality control or new features and styling are subject to diminishing marginal benefits. An independent association, the International Footwear Federation, obtains the needed data annually from all footwear

plants, tests all models and brands on the market, and rates the quality of shoes produced at each plant of each company. The ratings of product quality at each plant range

The four factors that determine product quality are: 1. Long-wear materials percentage 2. Quality control expenditures
The four factors that determine
product quality are:
1.
Long-wear materials percentage
2.
Quality control expenditures per
pair produced (in the current year)
3.
Cumulative quality control
expenditures per pair produced
4.
Styling/features budget per model

from a low of 0 to a high of 250; a rating of 50

or below denotes “minimal quality” and a

rating of 90 to 120 is considered

“satisfactory.” The federation's formula

for calculating product quality at each plant is complex because of diminishing

marginal benefits associated with greater expenditures and effort on each quality determinant, but the approximate composition of

the rating points is shown in Exhibit 3-1.

Section 3: Competition and Demand Forecasts

The sum of the points a plant gets on all four factors equals the plant's quality

rating, subject to the 250-point limit. The federation then takes the ratings of shoe quality at each plant and, based on where each plant's output is shipped and on the quality of pairs in unsold inventory, calculates quality ratings for each company in each market where its shoes are available for sale. Companies thus have five quality ratings—one for private-label shoes offered for sale in North America and one each for branded shoes offered for sale in North America, Europe, Asia, and Latin

America. A company's quality rating in each market segment is a weighted average of the product quality at the plants from which the pairs were shipped, adjusted up or down by the number and quality of any unsold pairs in inventory. For example, if a company had no unsold inventory in its European warehouse and it then shipped in 500,000 pairs from a plant with a production quality rating of 75 and 500,000 pairs from a plant with a production quality rating of 125, the company's weighted average quality rating for the 1 million pairs available for sale in Europe would equal 100. The federation's quality rating formula also reduces the quality rating on all unsold private-label pairs by 5 points and the quality ratings on all unsold branded pairs by 10 points carried over in inventory to the following year since they represent last year's models and styles.

The Federation's ratings of each company's shoe quality in each market segment are published annually in the Footwear Industry Report and are posted on its Web site. The qualities of various brands are often the subject of newspaper and magazine articles. Market research confirms that many consumers are well informed about the quality ratings and consider them in deciding which brand to buy. For example, if two competing brands were equally priced, most consumers would be inclined to buy the brand with the highest quality. Other competitive factors being equal (price, retail outlets, product line breadth, advertising, and so on), companies with higher quality shoes will outsell companies with lower quality shoes.

Product Line Breadth. Companies can elect to have a product line consisting of 50, 100, 150, 200, or 250 models or styles. To be regarded as a full-line producer, a company

needs to have 250 models in its product line. A company with 50 models is looked upon as a specialty-line manufacturer. The competitive value of a broader product line is that the company can participate in more end-use segments (jogging, walking, aerobics, basketball, golf, tennis, and so on) and give customers a wider selection of shoe types and styles to choose from. In effect, the more models/styles a company has in its product line, the more reasons consumers have to consider buying one or more pairs of the company’s footwear. If all other competitive factors are equal (price, quality, service, advertising, brand image, and so on), companies with more models and styles in their product lines will outsell companies offering fewer models.

Each plant is capable of producing 50, 100, 150, 200, or 250 models. The number of models a company has available in a given geographic region distribution center is a function of the number of models/styles produced at the plants from which the shoes were shipped. For example, if a company has 500,000 pairs of shoes available for sale in its Asian distribution center in Singapore and half of the pairs came from a plant producing 100 models and half came from a plant producing 200 models, then the weighted average number of models/styles that Asian consumers have to choose from is 150.

Customer Rebates. As an added sales inducement, manufacturers have the option of offering shoe buyers a rebate on each pair purchased from retailers. Some manufacturers offer promotional rebates and some don't. Rebates, if offered, can range from as low as $1 per pair to as much as $10 per pair. Manufacturers who give rebates

Section 3: Competition and Demand Forecasts

provide retailers with rebate coupons to give buyers at the time of purchase. To obtain the rebate a customer must fill out the coupon and mail it to the manufacturer's distribution warehouse, along with the receipt of purchase. The customer service staff at the warehouse handles verification, check processing, and mailing the rebate. Some buyers lose the coupon or the sales receipt and other buyers, for various reasons, fail to take advantage of the rebate offering. Studies show that 15% of purchasers mail in the $1 rebate coupons; 20% mail in the $2 coupon; 25% redeem the $3 coupon; and so on up to 60% for the $10 coupon. Other things being equal (price, quality, brand image, and so on), companies offering big rebates will outsell companies offering small rebates (or no rebates).

Current-Year Advertising. Media advertising is used to inform the public of newly introduced models and styling and to tout the company’s brand. Even though retail dealers act as an important information source for customers and actively push the brands they carry, advertising strengthens brand awareness, helps pull shoe buyers into retail stores carrying that brand, and informs people about the latest styles and models. The competitive impact of advertising depends on the size of your company’s current-year advertising budget. A company's market aggressiveness in promoting its lineup of models and styles in a given geographic area is judged stronger when its annual advertising expenditures exceed the area average and is judged weaker the further its ad budget is below what rival companies are spending on average. Other competitive factors being equal, companies with above-average current-year advertising expenditures outsell companies with below-average current advertising expenditures.

Celebrity Endorsements and Brand Image. As in other industries, footwear companies can contract with celebrity sports figures to endorse their footwear brand and appear in company ads. Celebrity endorsements, along with the impressions and perceptions people gain from watching a company’s media ads over time, combine to define how strong a brand image a company enjoys in the minds of athletic footwear buyers. Studies confirm that a company’s brand image has a significant effect on buyer purchases.

Each year the International Footwear Federation conducts studies to determine each company’s brand image and calculates each company’s image rating in North America, Europe, Latin America, and Asia. The federation’s brand image rating is based on (1) the cumulative amount of advertising a company has done in a given geographic area over time and (2) the combined influence of a company’s celebrity endorsers.

Company image ratings can range from a low of 0 to a high of 250 points, with

cumulative advertising and celebrity endorsements each representing a maximum of 125 points in the federation’s image rating formula. The influence of the company’s celebrity endorsers is, of course, greatly enhanced by higher levels of current year advertising—it would make little sense to sign

The image rating is a function of: 1. Cumulative advertising expendi- tures (up to 125 points)
The image rating is a function
of:
1. Cumulative advertising expendi-
tures (up to 125 points)
2. Celebrity endorsements (up to 125

celebrities and then not feature them in

company advertising. The company with

the largest cumulative advertising in a

geographic region and the most influential celebrity lineup enjoys the strongest brand

image in that region.

The Number of Retail Outlets. Independent retail outlets are currently the most important distribution channel. The more independent retail outlets a company has carrying its brand of shoes, the more market exposure a manufacturer has and the easier it is for consumers to find a nearby store from which to purchase the brand. While

Section 3: Competition and Demand Forecasts

having more retail outlets is generally better than having fewer outlets, a company can still generate substantial sales in a geographic area with as few as 100 retail outlets, provided the company's shoe line is otherwise amply attractive to consumers and provided it has an attractive Web site offering for online sales and perhaps also utilizes retail megastores to supplement its network of independent shoe retailers.

Independent retailers, however, do not normally stock only one line of athletic foot-

wear; most outlets carry three to five brands to provide customers with greater selection. It is very easy for a company to recruit more retailers to handle its brands because of the growing popularity of athletic footwear. At present, it costs $100 annually to support each retail outlet in a company's retail dealer network. This charge represents the costs of making sales calls, providing retailers with in-store promotional materials, printing catalogs showing models and prices, furnishing store clerks with sales information, and maintaining current credit ratings for each retailer. Currently, your company has 5000 North American retail outlets, 500 Asian outlets, and 1000 European outlets. If all other competitive factors are equal, companies with larger numbers of retail outlets in a given geographic area will outsell companies with smaller retail networks.

Retailer Support and Online Service. As part of their commitment to providing adequate service to independent retail dealers, it has been customary for all footwear manufacturers to employ a staff of customer service representatives who are available online or via telephone and fax to handle inquiries, take orders, and resolve any problems dealers are having. Footwear retailers are inclined to push the brands of those footwear manufacturers that provide them with the best customer service. Retail dealers and their store personnel want to deal with a footwear supplier that provides timely,

attentive answers to questions and tries hard to resolve their problems. In an effort to help
attentive answers to questions and tries hard to resolve their problems. In an effort to
help inform independent footwear retailers about the caliber of customer service
provided by the various footwear manufacturers, the International Footwear Federation
calculates and reports service ratings for each
manufacturer in each geographic market. The
federation’s customer service ratings are a
function of (1) whether a manufacturer has
stocked out of certain sizes and models in the
previous year and been unable to fill buyer
orders, (2) actual delivery time achieved in
the previous year on footwear orders, (3)
whether a company’s distribution centers
devote sufficient resources to dealer support
and service to provide short response times on
inquiries and properly oversee the order
fulfillment process, and (4) the desired delivery time
targeted for the current year.
The four factors that determine
the service rating are:
1.
Stockouts in the previous year
2.
The delivery time achieved in
the previous year
3.
The resources devoted to handl-
ing customer inquiries and re-
solving customer problems in
the current year
4.
The desired delivery time in the
upcoming year

As with the quality rating, the Federation's service rating ranges from a low of 0 to a high of 250. The federation's point system for calculating service ratings is shown in Exhibit 3-1. Each company's customer service ratings for North America, Europe, Asia, and Latin America are published annually in the Footwear Industry Report. Athletic footwear retailers and online buyers consult the federation’s service ratings help them decide of which company to patronize. Independent footwear retailers, most of whom stock multiple brands of athletic footwear, are prone to put most of their in-store sales and merchandising emphasis on the brands of companies with good service ratings.

Section 3: Competition and Demand Forecasts

The big majority of retailers do not want to spend time hassling with manufacturers about assorted service-related issues.

While retailers can easily live with a 4-week delivery time on footwear orders, manufacturers can boost their service rating by cutting the delivery times on the orders of footwear retailers to 3 weeks, 2 weeks, or 1 week. The federation considers an expenditure of $500 per independent retailer for dealer support and online services to be

"standard"; companies can boost their service ratings with resource expenditures of more than $500 per dealer or can elect to economize on service costs by allocating less than $500 per dealer to their customer service effort. Stockouts above 100,000 pairs reduce the service rating; the bigger the stockout percentage, the bigger the service rating penalty. The Federation's formula regarding stockouts calls for the maximum point penalty anytime a company's stockouts exceed 100% of branded sales

(provided the stockout is greater than 100,000 pairs). The Federation believes a severe service rating penalty is justified for 100%-plus stockouts because stockouts of such magnitude mean that a company was unable to fill over half of its orders from would-be buyers—an unacceptable condition from a customer perspective.

Exhibit 3-1 How the Three Ratings Are Calculated Rating Factors in the Rating Point System and
Exhibit 3-1
How the Three Ratings Are Calculated
Rating
Factors in the Rating
Point System and Weighting
Quality Rating
1.
Percentage usage of long-wear
materials at each plant
Rating points for usage of long-wear materials: 0 to 90
points.
(ranges from 0
to 250 points)
2.
Expenditures for styling and
features per model per plant
Rating points for styling and features expenditures: 0
to 90 points
3.
Current-year spending for quality
control per pair produced by
plant
Rating points for current-year spending for quality
control: 0 to 33 points
Rating points for overall average quality control expendi-
4.
The company’s overall average
expenditure for quality control
per pair produced at all plants for
all years (this measures the
extent of the company’s long-
term quality control effort and
reflects the potential to transfer
quality know-how and effort
across plants)
tures:
0 to 47 points
Special Note: The federation's quality rating formula
calls for reducing the quality rating on all unsold pairs
carried over in inventory to the following year, since
they represent last year's models and styles. Unsold
private-label pairs receive a 5 point penalty and unsold
branded pairs receive a 10 point penalty. Quality
ratings are calculated for each plant to track quality
produced, and also for each region of the world to track
where the footwear of various qualities is shipped and
marketed.
Image Rating
1.
(ranges from 0
to 250 points)
Cumulative expenditures on ad-
vertising by geographic region
(all years combined)
Cumulative advertising and celebrity endorsements each
represent a maximum of 125 points in the federation’s
image rating formula. Higher current-year advertising
boosts the market impact of celebrity endorsers.
2.
Combined global influence of the
company’s celebrity endorsers
Image ratings are calculated for each geographic region
of the world market to account for different advertising
expenditures in different regions.
Service Rating
1.
Stockouts in the previous year
(ranges from 0
to 250 points)
Rating points: 50 points for stockouts of less than
100,000 pairs; anywhere from 50 to –128 points,
depending on the size of the stockout as a percent of
the company’s branded sales in the region. The
maximum point penalty applies anytime a company's
stockouts exceed 100% of branded sales and 100,000
pairs.
2.
Delivery time to independent foot-
wear retailers achieved in the
previous year (4 weeks, 3
Rating points for delivery time achieved:
4 weeks:
0 points
20

Section 3: Competition and Demand Forecasts

weeks, 2 weeks, or 1 week)

  • 3. Expenditures for dealer support and online services, using a benchmark of $500 per retail dealer as “standard”

  • 4. Desired delivery time to indepen- dent footwear retailers targeted for the upcoming year (4 weeks, 3 weeks, 2 weeks, or 1 week)

  • 3 weeks

24 points

  • 2 weeks: 52 points

  • 1 week:

80 points

Rating points: –33 points to 80 points

Rating points for desired delivery time:

  • 4 weeks:

0 points

  • 3 weeks

12 points

  • 2 weeks: 26 points

  • 1 week:

40 points

Service ratings are calculated for each geographic region to account for different resource expenditures for dealer support and online services in different regions.

In Year 10, your company's service rating was 100 in North America, Asia, and Europe, determined as follows: 50 points for not having stocked out in Year 9, 24 points for achieving 3-week delivery in Year 9, 14 points for having a "standard" $500 per dealer expenditure, and 12 points for a delivery time target of 3 weeks in Year 10. A service rating of 50 denotes "minimal service" and a rating of 100 is considered "satisfactory." Other competitive factors being equal (price, quality, and so on), companies with higher service ratings will outsell companies with lower service ratings.

Company-Owned Retail Megastores. At present, no company has chosen to integrate forward and open its own retail outlets for branded footwear. But recent marketing research indicates that opening a chain of two-level 14,000 square-foot company-operated stores in high-traffic, upscale shopping centers and shopping malls could materially enhance the company’s brand name visibility. Such high-profile stores would give a company the means of showcasing its entire lineup of models and styles (most independent footwear retailers stock only selected models and styles of any one brand) and sell branded footwear at retail prices directly to consumers rather than at wholesale to independent retail dealers. The research indicates that for company- owned stores to generate the highest customer traffic and have the greatest sales- and revenue-increasing impact, company-owned stores should be equipped with a miniature

running track and a half-court basketball area where athletically-minded teenagers and young adults can put on a pair of shoes they are considering and try them out on the track or the basketball court. Moreover, store personnel need to have personalities that foster a festive, energetic in-store shopping environment and be trained to deliver attentive personal service. There’s every indication that such stores generate good shopper traffic and have a strongly positive effect on unit sales volume and overall company revenues once the company opens a sufficient number of stores to achieve a critical mass. Other competitive factors being equal (price, quality, and so on), the latest marketing research indicates that companies with more retail megastores will outsell companies with fewer such stores and will be able to charge somewhat higher overall prices.

However, company owned and operated retail megastores pose some distribution channel conflict. Because independent retailers see such stores as cannibalizing their own sales of the company’s shoes, should footwear manufacturers integrate forward into brick-and-mortar retailing they can expect growing antagonism from independent retailers—many of whom are already distressed about the company’s Web site entry into online retailing. As a general rule, the more retail megastores a company opens in a particular geographic region (North America, Europe, Asia, and Latin America), the more that independent retailers will push other brands and styles of footwear and the

Section 3: Competition and Demand Forecasts

weaker will be network.

the

sales-increasing effect of the company’s independent retailer

The Attractiveness of the Company’s Web Site and Online Sales Effort. All companies in the industry are currently offering their entire line of models and styles for sale at their Web sites. Online shoppers can go to the Web site, browse through color photos of the entire product line, read descriptions of each model and style, and place orders online. The company utilizes state-of-the art shopping cart software, has online credit card authorization, and uses the latest and best Web site security systems. Orders are forwarded to the nearest geographic distribution center where the order is picked, packed, and shipped usually within 24 hours.

At present, online sales have both pluses and minuses. The Web site allows the company to reach shoppers anywhere in the world, especially those not within easy shopping distance of a retailer stocking the company’s brand. And, the company realizes more revenue per pair from selling its footwear above the price that it gets selling at wholesale to retail dealers. But independent retailers see the Web site as an attempt by the company to encroach on their business, and there’s no question that some shoppers will switch their purchases from independent dealers (or retail megastores) to online purchases.

A company’s online sales volume is a function of three global factors and three region-specific factors. The three global determinants of the unit volume sold online are (1) the number of different models and styles offered at the Web site, (2) the company’s

average retail sales price for these models and styles, and (3) speed of delivery (the four options are next-day air, 3-day air/ground, 1-week standard, and 2-week economy shipping). The three region-specific factors are product quality, image rating, and advertising in the buyer’s region of the world market. Shipments to online buyers are always made from the distribution warehouse serving the buyer’s geographic region. Since the average quality of footwear in each regional warehouse can vary from region to region, as can the company’s image rating and advertising, it is logical that these three region-specific factors come into play in determining online sales in each part of the world market for branded footwear. The more favorably that your company’s product quality, image rating, and advertising in a given region compare with those of rival footwear companies and the more favorably that your company’s average online retail sales price, models offered, and delivery times compare with those of other online competitors, the bigger your online sales volume and online market share will be.

In Year 10 worldwide online sales of branded footwear accounted for 10 percent of the total branded sales in North America, Europe, and Asia. Studies indicate that online

sales of branded footwear (all companies combined) may rise to as much as 11% of total branded sales in each geographic region in Year 11 and to as much as 12% of total branded sales in Year 12. The online sales percentage is always the same for all four geographic regions of the world (for reasons of simplicity). At this juncture, it is uncertain what the global online percentage will be in Year 13 and beyond, but you will be provided with a 5-year forecast at the end of Year 11. However, studies indicate that

online sales are unlikely to ever exceed 20% of total branded pairs sold in any one geographic region. This is chiefly because most buyers want to see the shoes in person and try them on to check for both comfort and looks before they buy them.

Customer Loyalty. Once footwear shoppers begin purchasing a particular company’s brand of athletic footwear, they are inclined to give that same brand fairly strong consideration in making their next purchases. While it is by no means certain

Section 3: Competition and Demand Forecasts

that buyers will return to the same brand, there is indeed a modest brand loyalty effect among a meaningful number of footwear buyers. The loyalty effect is strongest for those that enjoy above-average market shares and thus are considered by buyers to have relatively attractive competitive offerings (based on price, quality, model selection, rebates, and so on). Recent studies of the behavior of athletic footwear buyers indicate that there is virtually no customer loyalty to company brands that are perceived as substantially over-priced or unfashionable or have otherwise less attractive attributes than rival brands. In other words, footwear buyers are more likely to be repeat- purchasers of those brands with leading market shares than of those brands that have sub-par market shares.

Competitive Strategy Options
Competitive Strategy Options

With 11 competitive weapons at your disposal, you and your co-managers have many strategic options for positioning your company in the global marketplace and trying to out-compete rival companies. You can put more or less emphasis than competitors on winning sales in North America or Europe or Asia or Latin America. You can emphasize or de-emphasize private-label sales. In the branded market, you can pursue a competitive advantage keyed to low-cost/low-price, top-notch quality, brand name and brand image, a bigger network of retail outlets and retail megastores, a broader product line (up to 250 models), bigger promotional rebates, the convenience of online shopping, or any combination of these. You can pursue a similar competitive strategy in North America, Europe, Asia, and Latin America or you can craft different strategies keyed to the different conditions prevailing in each geographic market. There's no built-in bias that favors any one strategy over all the others. Most any well-conceived, well-executed competitive approach is capable of producing good financial performance, provided it is not overpowered by the strategies of your competitors. Which company or companies win out in the upcoming battle for industry leadership will depend entirely on who is able to out-strategize, out-compete, and outperform the others.

The Demand Forecast Screen
The Demand Forecast Screen

To forecast the number of branded pairs your company can anticipate selling in each branded geographic region, you should go to the Menu Bar and select the Demand Forecast button, which will take you to the screen shown in Exhibit 3-2. There’s a lot of information on the screen, so you will need to pay attention to the labels and calculations and give yourself time to absorb all that is happening on the screen. While the screen admittedly looks complicated, you’ll find it is really pretty easy to use once you dig in, play around with some of the entries, make a couple of demand forecasts, and become familiar with how it works.

Exhibit 3-2 The Demand Forecast Screen
Exhibit 3-2
The Demand Forecast Screen

Section 3: Competition and Demand Forecasts

Section 3: Competition and Demand Forecasts Adjusting for the S&P 500 and Competitive Aggressiveness. In the

Adjusting for the S&P 500 and Competitive Aggressiveness. In the first block at the top of the screen are four rows of data and entries that allow you to “what-if” the effect of changes in the S&P 500 and above-average or below-average competitive aggressiveness. Keep in mind that year-to-year increases in the S&P 500 Index will boost footwear sales potentials worldwide whereas year-to-year declines will shrink worldwide market potential. The maximum impact is ±10%. The S&P 500 Index will have no impact on the Year 11 forecast, however. The S&P 500 Index value for Year 11 is the starting value; the first impact of changes in the S&P 500 on forecasted sales potential comes in Year 12. When your instructor/game administrator announces the new S&P Index value, you can calculate the percentage change and use it to estimate whether market demand is likely to be higher or lower than the unadjusted forecast provided in the Footwear Industry Report. For the first year of the simulation, you should enter 0 for each of the competitive aggressiveness fields. It will take several years for you to develop the data needed to analyze the effect of this adjustment factor.

Forecasting Your Company’s Sales and Market Share. The middle block of data and entries on the Demand Forecast screen is the most important. On the left (light- shaded area in Exhibit 3-2), you should enter tentative values for the Internet price, the number of models offered, and speed of delivery option. Because online sales reach buyers across the world, it is company policy to offer a number of models online that is no greater than the smallest number of models available in any one of the company’s regional warehouses.

Section 3: Competition and Demand Forecasts

Next you should proceed to enter tentative values for your company’s branded sales effort—the numbers already on the screen are the values for the preceding year. The first column in each regional market merely records the current entries you’ve made on the branded marketing decisions screen (as concerns retail outlets, advertising, rebates, and wholesale selling price) and the other current factors that shape your company’s overall competitive effort (number of models, product quality, customer service rating, and image rating) to win sales and market share in North America, Europe, Asia, and Latin America (the earliest you can begin selling in Latin America is Year 12). When you first arrive at the Demand Forecast screen, these same values already appear in the cells in the “what-if” marketing effort column (the second column). In the adjoining column (labeled Industry Average), you should enter your “best- guess” estimates of what the industry average competitive effort will be. In other words, your best estimate of the upcoming year’s average selling price in the region, average quality rating in the region, average service rating in the region, and so on. This requires making judgments about whether competitors, on average, will

increase/decrease their selling prices, product quality, service, number of models, advertising levels, and so forth. Then in the row below all these entries, you must enter how many companies you expect to be competing in the various geographic regions (in Year 11, it is likely, though not guaranteed, that all companies in the industry will compete for sales and market share in North America, Europe, and Asia). How many companies will actually go forward with plans to enter the Latin America market and begin selling branded footwear in Year 12 is, of course, highly uncertain and a potential source of error in your sales and market share forecast for that region. The Company Demand Forecast values on the Demand Forecast screen include online sales in each geographic region of the world.

The Importance of What-If. By “what-ifing” various values for your own company’s selling price, quality, models, advertising, retail dealers, company-owned megastores, rebates, and so on, you can see the impact of various sales and marketing combinations on your company’s estimated sales volume. You’ll find “what-ifing” to be a critical ingredient of your decision-making process each year in arriving at a strategy for competing effectively against rivals and generating the revenues and sales volumes needed to produce good bottom-line performance.

In Year 11, for example, you know that branded footwear demand will average 1,500,000 pairs in North America, 450,000 pairs in Asia, and 625,000 pairs in Europe. By out-competing rival companies in a given geographic area, your company can achieve sales volumes exceeding these averages. The demand forecasting screen is your best tool for judging what kind of sales and marketing effort your company will need to

outsell rivals and to grow market share. While taking some market share away from less competitive brands is very doable, the important thing to discover from what-ifing is what levels of pricing, product quality, advertising, and so on it will likely take to achieve sales volumes that are 20% to 30% or more above the market averages. The demand forecasting model will help you estimate the effect of a $1 lower selling price or a $2 million increase in advertising or a 15-point increase in quality on your company’s sales volume. You’ll find the estimates provided by the demand forecasting model to be much more reliable than guessing and hoping. If you and your co-managers want to be very aggressive and win enough market share away from rivals to outsell them by 50%, 75%, 100%, or more, the demand forecasting model can help you gauge what level of competitive effort it will take to achieve such results in the face of opposing competition from other companies (as represented by the industry average values that you and your co-managers anticipate will prevail). But you also have to understand that any market share gains your company achieves at the expense of rivals in one year may prove

Section 3: Competition and Demand Forecasts

short-lived because rivals can be expected to retaliate in the following year by upping their competitive effort and trying to regain some of their market share losses.

What Can Cause the Demand Forecasts to be Wrong? The demand forecasting model provides you with only projections of your company’s market share and how many pairs your company can expect to sell—the model’s projections are not guarantees. The forecasted sales volumes and market shares may deviate from the actual sales and market shares for three reasons:

  • 1. Your projections of one or more of the industry averages (and thus the degree of competition from rivals) may prove to be too high or too low.

  • 2. The actual effect of changes in the S&P 500 Index or in the overall competitive aggressiveness of rivals can differ from your percentage estimates.

  • 3. The number of companies competing in each geographic region may turn out to be more or less than you estimate.

Normally, the projected sales volumes will prove accurate within ±5% of the number of pairs actually sold, provided your projections of the upcoming year’s industry averages, the number of competitors in each geographic region, and the percentage changes in the S&P 500 and competitive aggressiveness are on target.

Tips for Using the Demand Forecast Screen Effectively. The Demand Forecast screen provides you and your co-managers with a valuable tool for estimating the outcomes of different competitive effort combinations. If the projected market share and sales volumes are below the levels you would like (or if they exceed what you are able to produce and deliver), go back to the “company effort” column and watch what happens to the projected number of pairs sold when you raise/lower the number of models, increase/decrease quality, spend more/less on advertising, increase/decrease the wholesale price, and so on. By playing around with different combinations of prices, models, quality, rebates, advertising, and so on, you can get a pretty good handle on what combination of competitive effort is likely to be needed to achieve the desired market share and sales volume in each of the three branded markets. When you and your co-managers reach a consensus on the what-if entries for your company (models, quality, retail outlets, rebates, advertising, and so on) that you believe will be needed to achieve the desired sales volumes and market shares, given the anticipated competition from rivals that are reflected in the industry averages you have entered, then you are ready to move to the production and warehousing and shipping screens and make decisions to stock the various distribution warehouses with the necessary pairs to meet the associated sales and inventory requirements.

In the years ahead, you’ll find that the Demand Forecast screen provides valuable guidance in forecasting sales and in helping you and your co-managers choose what price to charge and what branded marketing effort to employ. To make the most effective use of the Demand Forecast Screen, do the following:

Go to the Demand Forecast screen early in your decision-making process to develop a rough or preliminary company demand forecast as a starting point for planning how many pairs to produce at your plants and how many pairs

to ship to each of the distribution warehouses. Once you have a tentative idea of how many pairs you can expect to sell in the upcoming year, you can quickly move on to the decision screens for plant operations, warehousing and shipping, and marketing operations and make decisions in all of the areas as required. As you and your co-managers decide what to do in all these areas of

Section 3: Competition and Demand Forecasts

the company’s operations, you can track the impact on sales revenues, net profit, EPS, ROI, and Cash by monitoring the last row of calculations at the bottom of the screen—these are updated each time you enter a new decision. When you have made a complete trial decision, return to the Demand Forecasting screen to revise and refine your sales forecast. You can press the Update button to automatically import all the branded marketing decisions on the decision screens back into your demand forecast. If you are not satisfied with the projected outcomes for revenues, net profit, EPS, ROI, and cash balance at the bottom of the screen or if you want to explore ways to boost overall company performance, then do some what-ifing.

Use the Demand Forecast screen to “what-if” the impact of competitors’ actions on your company’s sales and market share. Competitors might, for instance, decide to trim their selling prices, pushing the industry average in North America down from $40 to $38. To see what such a change would do to your company’s sales volume in North America, simply change the projected industry average wholesale price for North America from $40 to $38 and see what happens to your forecasted volume and percentage share. You can play around with different values for the various industry averages to get a good feel for the downside risks in your sales and market share forecasts should rivals unexpectedly increase their competitive effort. If you and your co- managers are in doubt about what industry average values to use as the basis for your demand forecast, then one good approach is to run worst-case and best-case scenarios. The worst-case scenario entails entering fairly strong increases in the industry averages (which signals stronger competition in the marketplace than previously) and observing the resulting downside impact on your projected sales volumes and market share. A best-case scenario involves entering little or no increase in the industry averages (which signals not much change in rivals’ overall competitive effort) and observing the upside impact on your company’s projected sales volumes and market shares. The worst-case and best-case projections provide a range in which your actual sales volumes and market shares should fall.

Use the Demand Forecast screen to “what-if” the changes in your own company’s sales volumes and market shares should you increase or decrease

your competitive effort. For instance, you can “what-if” the impact of increasing your price in Europe from $40 to $42.50. The calculations on the screen will show you what the projected decline in unit sales and market share will be and, even more important, what the impact would be on company revenues, net profits, EPS, ROI, and cash balance (the last row at the bottom of the screen). In similar fashion, you can try changing other elements of your company’s competitive effort—product quality, rebates, advertising, or dealer service—to see what the impact would be on forecasted sales, market share, revenues, net profit, EPS, and so on. This will help you zero in on what decision combination will produce the overall best set of results.

In the event you experience difficulty in generating relatively accurate forecasts of unit sales and market shares, it is nearly always because of having significantly misjudged the upcoming year’s industry averages for several of the competitive variables. To correct this, you’ll need to spend more time and effort studying what rival companies are doing, using the information provided in the Footwear Industry Report and the Competitor Analysis Report as a basis for your analysis. Keep in mind, most all companies are not going to utilize the same competitive effort in the upcoming year as

Section 3: Competition and Demand Forecasts

they did last year. Just as you and your co-managers will decide to increase or decrease prices, quality, rebates, advertising, and so on to improve your company’s market share and performance, the managers of rival companies are likely to make changes in their overall competitive effort to enhance their company’s performance. Companies that did poorly in the last year are strong candidates to make significant changes, and the industry leaders, despite having performed well, may institute significant changes as well in order to remain in the lead. Hence there are strong reasons for expecting some kind of change in the industry averages, as opposed to assuming last year’s averages will remain largely unchanged. It is up to you and your co-managers to be astute “market-watchers” and “competitor-watchers”; by Year 14 or 15, you’ll have enough data points for each of the industry averages to spot trends and you’ll begin to get a feel for how competitive market conditions are changing.

Section 3: Competition and Demand Forecasts

Plant Operations lant operations is one of the most strategically and operationally important areas of the
Plant Operations
Plant
Operations
Plant Operations lant operations is one of the most strategically and operationally important areas of the

lant operations is one of the most strategically and operationally important areas of

the company. Currently, the company has two plants, a 1 million-pair North American plant near San Antonio, Texas, and a recently constructed 3 million-pair plant in Asia. Given the expected growth in the global demand for athletic footwear, it is likely that you will find it desirable to construct additional production capacity—by expanding the existing plants and/or building new plants in Europe or Latin America or both. You may also elect to buy plant capacity from other companies in the industry or sell all or part of your existing plant capacity to interested rivals. Putting together a profitable production strategy for your company and operating the company’s plants in a cost-effective manner will thus occupy the time of you and your co-managers each decision period.

The latest company report on your company’s manufacturing operations is shown in Exhibit 4-1. All figures in this and other company reports are in thousands, except for the percentages and per pair items. The Manufacturing Report, provided annually after each year’s decisions are processed, gives you a rundown of production operations: manufacturing costs, assorted manufacturing statistics, the amount invested in plant and equipment, and plant capacity information. All the zeros in the columns for Europe and Latin America reflect the fact that your company has not yet built plants in these regions of the world.

Section 4: Plant Operations

Exhibit 4-1 The Manufacturing Report N. AMERICA ASIA EUROPE L. AMERICA P-Label Branded P-Label Branded P-Label
Exhibit 4-1
The Manufacturing Report
N. AMERICA
ASIA
EUROPE
L. AMERICA
P-Label
Branded
P-Label
Branded
P-Label
Branded
P-Label
Branded
OVERALL
MANUFACTURING COSTS
($000s)
Materials ÑÑÑÑNormal-Wear
0
4,320
2,300
8,500
0
0
0
0
15,120
Long-Wear
0
2,400
1,278
4,722
0
0
0
0
8,400
Labor ÑÑÑÑÑAnnual Wages
0
4,000
511
1,889
0
0
0
0
6,400
Incentive Pay
0
570
132
486
0
0
0
0
1,188
Overtime Pay
0
0
0
0
0
0
0
0
0
Plant Supervision
0
1,200
341
1,259
0
0
0
0
2,800
Quality Control
0
640
341
1,259
0
0
0
0
2,240
Styling / Features
0
1,000
200
600
0
0
0
0
1,800
Methods Improvements
0
0 0
0
0
0
0
0
0
Production Run Set-Up
0
2,000
1,000
1,000
0
0
0
0
4,000
Plant Maintenance
0
2,150
1,491
5,509
0
0
0
0
9,150
Depreciation
0
1,000
746
2,755
0
0
0
0
4,501
Total Manufacturing Cost
0
19,280
8,340
27,979
0
0
0
0
55,599
MANUFACTURING STATISTICS
Specifications ÑÑ
Quality
0
100
75
100
0
0
0
0
Models
0
100
100
100
0
0
0
0
Pairs Produced
0
800
426
1,574
0
0
0
0
2,800
(000s)
Pairs Rejected
0
40 26
102
0
0
0
0
168
(000s)
Net Production
0
760 400
1,472
0
0
0
0
(000s)
2,632
Reject Rate
0.00
5.00
5.50 6.50
0.00 0.00
0.00 0.00
6.00
(%)
Avg. Quality Control
($ / pair prod.)
($ / pair capacity)
0.80
0.80
0.00
0.00
Avg. Methods Imp.
0.00
0.00
0.00
0.00
Worker Productivity ÑÑÑÑYear 10
4,000
2,500
0
0
(pairs / worker / year)
Last Yr.
4,000
2,500
0
0
LABOR STATISTICS
Number of ÑÑÑÑÑÑ
Beginning
200
800
0
0
1,000
Employees
Hired (Fired)
0
0
0
0
0
Current
200
800
0
0
1,000
Compensation ÑÑÑÑÑÑ
Annual Wage
20.0
3.0
0.0
0.0
6.4
($000s per
Incentive Pay
2.1
0.8
0.0
0.0
1.1
employee)
Total
22.1
3.8
0.0
0.0
7.5
PLANT INVESTMENT
($000s)
Beginning Net Investment
16,000
66,500
0
0
82,500
Plus Capital Additions
0
0
0
0
0
Less Y10 Depreciation
1,000
3,500
0
0
4,500
Ending Net Investment
15,000
63,000
0
0
78,000
CAPACITY STATISTICS
(000s)
Year 10 Plant Capacity
1,000
3,000
0
0
4,000
New Plant Construction
0
0
0
0
0
Plant Capacity Expansion
0
0
0
0
0
Plant Capacity for Year 11
1,000
3,000
0
0
4,000
Max. Production (at full OT)
1,200
2,400
0
0
3,600
Automation of ÑÑÑÑÑÑÑÑ
Option A
-----
-----
-----
-----
Plants
Option B
-----
-----
-----
-----
(year ordered)
Option
C
-----
-----
-----
-----
Option D
-----
-----
-----
-----
Option E
-----
-----
-----
-----
Option F
-----
-----
----- -----

Section 4: Plant Operations

There are several things worth mentioning about the manufacturing report in Exhibit 4-1 and about your company’s production operations:

Materials costs in Year 10 were lower that the base material prices of $9 per pair for normal-wear and $15 per pair for long-wear. This is because industry-wide capacity utilization in Year 10 was 70%—as stated in Section 1, whenever worldwide shoe production falls below 90% of the footwear industry's worldwide plant capacity, the market prices for both normal and long-wear materials drop 1% for each 1% below the 90% capacity utilization level. The company maintains no inventories of normal-wear and long-wear materials because suppliers have the capability to make deliveries on an as-needed basis. Plant managers provide suppliers with production schedules two weeks in advance to enable them to arrange for materials deliveries.

Labor costs consist of base wages and fringe benefits, piecework incentives paid for each pair produced that meet quality standards, and overtime pay. In Year 10, labor costs totaled $4,570,000 at the North American plant and $3,018,000 at the Asian plant. Given production of 800,000 pairs in North America and 2,000,000 pairs in Asia, this is equivalent to labor costs per pair produced of $5.71 in North America ($4,570,000 800,000 pairs = $5.7125) and $1.51 in Asia ($3,018,000 2,000,000 pairs = $1.509). The per pair labor cost differential between the two plants stemmed from differing wage rates ($20,000 versus $3,000), incentive pay ($2,100 versus $800), and productivity levels (4,000 pairs per worker versus 2,500). The sizable labor cost differential between the two plants should be a matter of concern and is something you and your co-managers ought to address in the upcoming years.

Section 4: Plant Operations There are several things worth mentioning about the manufacturing report in Exhibit
Section 4: Plant Operations There are several things worth mentioning about the manufacturing report in Exhibit

All overtime work in all geographic areas entails overtime labor costs equal to 1.5 times the normal base wage cost per pair produced; the prevailing piecework incentive bonus is also paid on all non-defective pairs produced at overtime in addition to the overtime wage. Although there was no use of overtime in Year 10, any future amounts for overtime pay that are reported will

always include all overtime compensation—overtime wages plus the applicable incentive pay per pair at overtime. The number of pairs which can be produced at a plant without the use of overtime is limited to plant capacity or to the number of workers employed times productivity per worker, whichever

is less. For instance, if you and your co-managers decide next year to employ 700 workers at the Asian plant (instead of 800 as in Year 10), and if worker productivity continues to be 2,500 pairs per worker per year, then the maximum number of pairs which can be produced without use of overtime is 700 2,500 or 1,750,000 pairs; with a workforce of 700 and productivity of 2,500 pairs, overtime production will thus begin at 1,750,000 pairs instead of 3,000,000 pairs. Moreover, the maximum amount that can be produced at overtime with 700 workers is 20% of 1,750,000 pairs or 350,000 pairs, not 400,000 pairs as would be the case if the plant were staffed to full production capacity with 800 workers.

Section 4: Plant Operations There are several things worth mentioning about the manufacturing report in Exhibit

The amount spent on quality control is important in two respects: First, annual expenditure on QC at a given plant has a significant impact on the number of pairs that pass final inspection. The bigger the annual QC effort at a plant (measured in terms of QC expenditures per pair produced), the smaller the reject rate at final inspection. Second, the annual quality control expenditures at a plant and the cumulative quality control expenditures per pair produced companywide are two of the major components in the International Footwear Federation's annual quality rating calculation.

Section 4: Plant Operations

The company maintains a staff of people who work exclusively on keeping the company's product line fresh and innovative. Once management decides how many models to produce at each plant (the options are 50, 100, 150, 200, or 250), this staff is charged with coming up with the needed footwear designs and styling/features for the company to promote each year. The caliber of their styles and designs is a function of the size budget they are given; the amount budgeted per model/style at each plant is used by the International Footwear Federation in calculating the plant's annual quality rating.

Production run set-up costs vary according to the number of models produced at a plant. The annual set-up cost for 50 models is $1 million per plant; for 100 models it is $2 million per plant; for 150 models it is $4 million per plant, for 200 models it is $6.5 million per plant, and for 250 models it is $9 million. The size of the plant does not matter in determining production run set-up costs, only the number of models. Both the North American and Asian plants produced 100 models/styles of athletic footwear in Year 10.

Maintenance costs in a given year equal 5% of gross plant investment plus another 0.25% for each year of age past five years. "Gross plant investment" represents the total dollar amounts the company has invested in each plant (initial plant costs, the capital cost associated with any expansion, plus any investment in plant upgrades). This amount is not shown on the report but is nonetheless accurately tracked by company accountants.

Plant life is 20 years, and depreciation is calculated on a straight-line basis equal to 5% of gross plant investment per year.

Worker productivity at each plant is affected by five things: (1) the percentage increase in the annual wage granted to workers each year, (2) how much emphasis is placed on incentive compensation (as measured by the percentage of the company's total compensation package accounted for by incentive pay), (3) how the company's total compensation package (annual wage plus total incentive pay before any overtime) compares against the average compensation package of other footwear companies with plants in the same geographic area, (4) whether you are expanding employment and hiring additional workers or cutting employment levels by laying off workers, and (5) your expenditures for production methods improvements in each plant.

Net plant investment represents the undepreciated book value of the plant—in accounting terms, it equals gross plant investment less accumulated depreciation.

As the simulation progresses, you will have opportunities to improve the operating efficiency of your plants and lower costs. Company co-managers can take any of several actions to operate the company’s plants more effectively and efficiently:

Undertaking

any

of

six

capital

improvement

projects

to

upgrade plant

operations.

Increasing annual efforts to improve production methods.

 

Altering annual wages and piecework incentives in ways that boost the productivity of the plant workforce.

Section 4: Plant Operations

Taking actions to lower the number and percentage of defective pairs produced (Year 10 reject rates were 5.4% at the North American plant and 5.7% at the Asian plant).

Exhibit 4-2 shows itemized Year 10 production costs by plant and by type product for the company’s two plants. You will be provided with copies of both reports after each year’s decisions have been processed as a basis for analyzing and improving your company’s plant operations.

Exhibit 4-2 Production Costs by Plant and by Product N. AMERICA ASIA EUROPE L. AMERICA P-Label
Exhibit 4-2
Production Costs by Plant and by Product
N. AMERICA
ASIA
EUROPE
L. AMERICA
P-Label
Branded
P-Label
Branded
P-Label
Branded
P-Label
Branded
OVERALL
Materials Ñ ÑNormal-Wear
Ñ Ñ
0.00
5.40
5.40
5.40
0.00
0.00
0.00
0.00
5.40
Long-Wear
0.00
3.00
3.00
3.00
0.00
0.00
0.00
0.00
3.00
Total
0.00
8.40
8.40
8.40
0.00
0.00
0.00
0.00
8.40
Labor Ñ Ñ Ñ ÑAnnual
Ñ
Wages
0.00
5.00
1.20
1.20
0.00
0.00
0.00
0.00
2.29
Incentive Pay
0.00
0.71
0.31
0.31
0.00
0.00
0.00
0.00
0.42
Overtime Pay
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Total
0.00
5.71
1.51
1.51
0.00
0.00
0.00
0.00
2.71
Plant Supervision
0.00
1.50
0.80
0.80
0.00
0.00
0.00
0.00
1.00
Quality Control
0.00
0.80
0.80
0.80
0.00
0.00
0.00
0.00
0.80
Styling / Features
0.00
1.25
0.47
0.38
0.00
0.00
0.00
0.00
0.64
Production Methods
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Waste due to Rejects
0.00
1.27
1.27
1.23
0.00
0.00
0.00
0.00
1.27
Production Run Set-Up
0.00
2.50
2.35
0.64
0.00
0.00
0.00
0.00
1.43
Plant Maintenance
0.00
2.69
3.50
3.50
0.00
0.00
0.00
0.00
3.27
Depreciation
0.00
1.25
1.75
1.75
0.00
0.00
0.00
0.00
1.61
Total Cost Per Pair Produced
0.00
25.37 20.85
19.01
0.00
0.00
0.00
0.00
21.12
(adjusted for rejects)
Pertinent Production Issues
Pertinent Production Issues

One production issue is how many private-label pairs to produce versus how many branded pairs to produce and at which plants to produce them. Prior management opted to make all private-label footwear at the Asian plant because of the significantly lower labor costs in Asia. Keeping production costs on private-label footwear as low as possible was deemed essential because of the lower price at which private-label shoes are sold—$40 per pair for branded shoes versus $34 per pair for private-label footwear in Year 10. Despite the lower price, private label sales have been an attractive distribution channel, generating Year 10 profits for the company of more than $2 million. Continuing to participate in the private-label segment, in the short run at least, would seem prudent. Prior management was unsure whether to pursue branded sales in all four geographic markets or to focus on building market-leading positions in just one or two geographic markets. While the earliest you can begin selling in Latin America is Year 12 (plans and arrangements for warehousing and shipping will not be finalized until the end of Year 11), the decision of how many branded pairs to produce will be driven partly by which branded markets you and your co-managers elect to focus on and the market share targets you wish to achieve. Related to the issue of branded shoe production is the quality of the branded footwear you wish to make. Prior management was unsure whether the company should produce essentially the same quality branded shoes for all branded market segments or whether to make high-quality shoes for some markets and

Section 4: Plant Operations

low-quality shoes for others. You and your co-managers will have the latitude to pursue a low-cost/low-price strategy in one branded market arena and a high quality/premium price/strong brand image strategy in another geographic region should you choose to do so.

A second, production issue is where to locate additional production capacity. A European plant is economically attractive because of the potential distribution cost savings (tariff avoidance and lower shipping costs) on future sales made in Europe; plant sites in Spain or Italy offer ample labor supplies and reasonable wage costs. A Latin American plant is economically attractive partly because of potential distribution cost savings on future sales in Latin America but mainly because of very low wage rates and the ready availability of both labor and plant sites; any pairs not sold in Latin America can be exported to other geographic markets. A large-scale Asian plant could become the company's principle production site, with pairs being exported to Europe and North America to meet growing demand in those markets. Having plants in all four geographic areas avoids the cost problems of tariff barriers but there can be economy- of-scale advantages to having one or two large plants as opposed to three or four smaller plants. You’ll have to decide what sort of plant configuration best fits your strategy.

Third and last, you and your co-managers need to address (1) whether to initiate plant upgrades or make other operating changes so as to reduce the relatively high labor costs at the company’s plant in North America and (2) whether to make base pay and incentive compensation adjustments at the North American and Asian plants in Year 11.

You can take decisive action

to

resolve all of these

issues

quickly or adopt a

cautious "wait-and-see" posture and defer actions until later.

Production and Labor Decisions
Production and Labor Decisions

Each decision period you and your co-managers must make a series of decisions

concerning plant operations and footwear production. All the decisions made each year are shown on the upper portion of the manufacturing decisions screen (the light- shaded area in Exhibit 4-3). The numbers appearing in the boxed decision entry cells represent prior management's decisions for Year 10. The information appearing in the lower portion of the screen

There will be no S&P 500 or exchange rate impacts in Year 11. Changes in these
There will be no S&P
500 or exchange rate
impacts in Year 11.
Changes in these
rates will first come
into play in Year 12.

represents calculations instantaneously provided by the computer each time you make a decision entry or a what-if

entry (these numbers are projections of the upcoming year’s results based on the decision entries currently residing on all 10 decision screens). These calculations

will help you assess the economics of the various decision options and give you a stronger basis for deciding what to do.

How Many Pairs to Produce. The three biggest factors to consider in deciding how many pairs to produce are (1) the number of pairs in inventory in each distribution center that went unsold in Year 10, (2) how many branded pairs you want left in inventory at the end of Year 11 as a safety buffer against stockouts or as a deliberate inventory build up to support sales in future years, and (3) how many private-label and branded pairs you expect to sell in Year 11—as determined by the entries you made on the Demand Forecast screen (discussed in Section 2). As was indicated earlier, the footwear demand forecasts for Years 11 and 12 are as follows:

Section 4: Plant Operations

Private-

 

Label

Branded Demand (in pairs)

 

Worldwide

Demand

North

Latin

Demand

(in pairs)

America

Asia

Europe

America

(in pairs)

Year 11

650,000

1,500,000

450,000

625,000

---

3,225,000

Year 12

700,000

1,650,000

575,000

725,000

300,000

3,950,000

These are averages per company. Your company's sales in an area can be more or

less than the average, according to whether your company's competitive effort is

stronger or weaker than the efforts expended by rival companies.

Exhibit 4-3 Production and Labor Decision Screen
Exhibit 4-3
Production and Labor Decision Screen
Section 4: Plant Operations Private- Label Branded Demand (in pairs) Worldwide Demand North Latin Demand (in

With maximum use of overtime, your company has the manufacturing capacity to

produce as many as 1,200,000 pairs at the North American plant and as many as

3,600,000 pairs at the Asian plant. You will need to decide how many branded and

private-label pairs to produce at each plant. Prior management elected to make all

private-label shoes in Asia because the lower labor costs at the Asian plant provided a

bigger profit margin on private-label sales.

Section 4: Plant Operations

Materials Decisions. All of the materials used in producing athletic footwear are

readily available on the open market. Some 300 suppliers worldwide have the capability

to furnish interior lining fabrics, waterproof fabrics and plastics for external use, rubber

and plastic materials for soles, shoelaces, and high-strength thread. It is substantially

cheaper for footwear manufacturers to purchase these materials from outside suppliers

than it is to manufacture them internally in the relatively small volumes needed.

Delivery time on all materials is no more than 48 hours, allowing manufacturers to

operate on a just-in-time delivery basis.

Suppliers offer two basic grades of raw materials: normal-wear and long-wear.

Long-wear fabrics and shoe sole materials improve shoe quality and performance, but

they currently cost two-thirds more than normal-wear components. Materials for a shoe

made completely of long-wear components cost $15 per pair versus a cost of $9 per pair

for shoes made entirely of normal-wear components. However, shoes can be

manufactured with any percentage combination of normal-wear and long-wear

materials. All footwear-making equipment in present and future plants permits use of a

mixture of normal-wear and long-wear components.

All materials suppliers charge the going market price, and the qualities of long-wear

and normal-wear materials are the same from supplier to supplier. Materials prices

fluctuate according to worldwide supply-demand conditions. Whenever worldwide

shoe production falls below 90% of the footwear industry's worldwide plant capacity

Materials prices fluctuate according to worldwide utilization of footwear plant capacity and the percentage use of
Materials prices
fluctuate according to
worldwide utilization of
footwear plant capacity
and the percentage use
of long-wear materials.

(not counting overtime production capability), the market

prices for both normal and long-wear materials drop

1% for each 1% below the 90% capacity utilization

level. Such price reductions reflect weak demand and

increased competition among materials suppliers for

the available orders. Conversely, whenever worldwide

shoe production exceeds 100% of worldwide plant

capacity utilization (meaning that companies, on average,

are producing at overtime), the market prices for normal and

long-wear materials rise 1% for each 1% that worldwide capacity utilization exceeds

100%. Such price increases reflect strong demand for materials and greater ability on

the part of suppliers to get away with charging more for essential raw materials.

A second demand-supply condition causing materials prices to change is

widespread substitution of long-wear materials for normal-wear materials. Once global

usage of long-wear materials passes the 25% level, the prices of long-wear materials

rise 0.5% for each 1% that the percentage use of long-wear materials exceeds 25%;

simultaneously, the worldwide market price of normal-wear materials will fall 0.5%

for each 1% that the global usage of normal-wear materials falls below 75%. Thus

the price gap between long-wear and normal-wear materials widens as global use of

long-wear materials rises above 25%.

Materials prices in Year 10 were $7.20 for normal-wear and $12.00 for long-wear

because capacity utilization in Year 10 was 70% (20% below the 90% threshold). The

Materials Price Estimates box on the lower left side of Exhibit 4-3 shows the expected

materials prices for the upcoming year based on (1) a rough estimate of the industry-

wide capacity utilization needed to meet projected demand in the upcoming year, (2)

global long-wear materials usage in the previous year, and (3) company expenditures on

production methods improvements. These estimated materials prices are used to

calculate projected materials costs for the upcoming year. When the upcoming year’s

results are processed, the materials prices you actually incur may be higher or lower

than the estimates provided on the Production and Labor Screen, because actual

Section 4: Plant Operations

industry-wide capacity utilization and long-wear materials usage may differ from what

was estimated.

Despite price fluctuations, materials suppliers have ample capacity to furnish what-

ever volume of materials that manufacturers need. No shortages have occurred in the

past. Just recently, suppliers indicated they would have no difficulty in accommodating

increased materials demand in the event footwear makers build additional plant capacity

to meet the growing demand for athletic-style shoes.

Footwear manufacturers are

thus assured of receiving all orders for normal-wear and long-wear materials no

matter how much new footwear capacity is built down the road.

The only materials-related decisions you make concern the percentage mix of long-

wear and normal-wear materials to be used in producing private-label and branded

footwear at each plant; "the computer" will automatically take care of ordering the

needed amount of materials based on the number of pairs you and your co-managers

decide to produce. You can use the same normal-wear/long-wear mix to make private

label and branded footwear (as in Year 10 at the Asian plant) or you can use different

percentage mixes. Moreover, you have the flexibility to vary the mix of normal-wear

and long-wear materials from plant to plant, thus allowing the company to produce

private-label and branded shoes of varying quality at different plants. Producing

different quality branded shoes at different plants can be beneficial if you and your co-

managers wish to sell different quality branded footwear in different geographic

markets.

Assuming no change in the other quality-determining factors, an increase in the

long-wear materials percentage will boost the quality of a plant's output and a decrease

will lower it. The International Footwear Federation's product quality formula is

programmed in so that you can immediately see the impact on product quality of a

change in the percentage use of long-wear materials—quality rating projections appear

on the first line of Production Statistics section in Exhibit 4-3. Also, you will be able to

see the cost impact of raising/lowering the long-wear materials mix by watching the

changes in materials cost and manufacturing cost per pair produced (in the lower

portion of the screen) as you make different entries for the long-wear percentage.

Decisions Regarding the Number of Models. You and your co-managers have the

option at each plant of producing 50, 100, 150, 200, or 250 models. Production run set-

up costs at each plant are $1 million for making 50 models; $2 million for 100 models; $4

million for 150 models; $6.5 million for 200 models; and $9

The wider the selection of models/styles offered, the wider the appeal of your product line, but
The wider the selection of
models/styles offered, the
wider the appeal of your
product line, but unless
corrective measures are
taken, more models will
increase reject rates and
decrease quality ratings.

million for 250 models. Widening your company’s

product line to include more models can have a

strongly positive effect on unit sales and market

share. But the sales-enhancing effect of more

models also carries a potentially sizable impact on

per pair production costs. At the North American

plant, for example, producing 1 million pairs and 50

models entails production run set-up costs of $1.00

per pair whereas producing 1 million pairs and 250

models entails set-up costs of $9.00 per pair. At the bigger

Asian plant, however, producing 3 million pairs and 250 models results in set-up costs

of just $3.00 per pair. If a major element of your company’s strategy is to have a broad

product line, you can combat the added cost per pair associated with production run

set-up costs by initiating a plant upgrade to cut these costs (see option F in Exhibit 4-5

discussed later in this section). Producing more models at each plant also affects the

number of defective pairs. The more models produced, the higher the reject rate; this

Section 4: Plant Operations

is because more frequent production run changeovers result in reduced worker

experience and skill in making each model. Furthermore, increasing the number of

models produced will lower the quality rating; this is because the quality rating is partly

a function of the amount spent for styling and features per model. You can overcome

the erosion of the quality rating by increasing expenditures for styling/features (or by

increasing quality control expenditures or by using a larger percentage of long-wear

materials, as discussed below).

It is important to understand that producing 100 models in the North American

plant and 100 models in the Asian plant entails producing the same set of 100 models at

each plant, not entirely different sets of models/styles. When footwear from different

plants producing different numbers of models/styles is shipped to a particular

distribution warehouse (Memphis, Brussels, or Singapore), the resulting number of

models/styles available to buyers in the market served by that warehouse equals the

weighted average number of models. For example, if the North American plant produces

1 million pairs and 50 models and the Asian plant produces 3 million pairs and 100

models and if 400,000 pairs from each plant are then shipped to the Brussels warehouse,

model availability in Europe will be an average of 75 models/styles (assuming no

inventory of pairs in Brussels). If there are already some pairs in inventory in Brussels,

the 75-model average will be adjusted up or down based on the number of models in

inventory.

The number of models your company makes available in each geographic market is

a big driver of your company’s branded sales and market share. The wider the

selection of models/styles offered (shoes for men, women, and children, and styles

suitable for running, jogging, aerobics, basketball, tennis, golf, casual wear, etc.), the

wider the appeal of your product line. Other things being equal (price, quality, brand

image, service, and so on), companies with a bigger selection of models in a

particular geographic region will outsell companies with a smaller selection.

Decisions Regarding Styling/Features and Quality Control. How much you and

your co-managers decide to spend for styling/features per model and for quality control

at each plant affect the International Footwear Federation's ratings of product quality at

each plant. As you make entries for models,

The four factors that determine product quality are: 1. Long-wear materials percentage 2. Quality control expenditures
The four factors that determine
product quality are:
1.
Long-wear materials percentage
2.
Quality control expenditures per
pair produced (in the current year)
3.
Cumulative quality control
expenditures per pair produced
4.
Styling/features budget per model

styling/features, and quality control, the

computer uses the International Footwear

Federation's

quality

rating

formula

to

calculate product quality at each

plant—see the first line in the Production

Statistics section on the screen in Exhibit

4-3. You can enter different values for

models,

styling/features,

and

quality

control, until you are satisfied with the

resulting quality of branded and private-label

footwear being produced and the production cost per

pair. Because the quality of footwear produced at one plant is affected by the

company’s overall cumulative quality control effort, it is possible for increases or

decreases in quality control spending at one plant to spill over to affect the quality of

footwear output at another plant.

Expenditures for production methods improvements in a particular plant act to: Reduce materials costs. Reduce plant
Expenditures for production
methods improvements in a
particular plant act to:
Reduce materials costs.
Reduce plant supervision
costs.
20

Decisions Regarding Production Methods

Improvements. This decision option allows you

to budget dollars for continuous improvements

in work practices and plant efficiency. These

Section 4: Plant Operations

expenditures go for worker training and skills development and to cover the costs of

altering plant layouts and production procedures to achieve efficiency gains. The

money you spend at a particular plant for methods improvements acts to (1) reduce

materials costs at the plant by as much as 25%, (2) reduce supervision costs in the

plant by as much as 25%, and (3) increase worker productivity by as much as 10%.

However, the full benefits cannot be reached in a single year—it will take a sustained

spending effort over 5 years or more to approach the maximum gains. Expenditures for

improved production methods have the same impact in all plants. In Year 10, the

company spent $23,520,000 on footwear materials and $2,800,000 on plant supervision

costs, so a 25% annual savings could prove significant. A 10% increase in worker

productivity in North America where productivity is presently 4,000 pairs per worker per

year and in Asia where productivity is presently 2,500 pairs per worker per year also

holds potential for meaningful cost reductions.

The size of the cost reductions for materials costs and plant supervision are a

function of the average annual amount spent per pair of production capacity; the size

of the gains in productivity are a function of annual expenditures per plant employee.

Because the benefits your company will realize from expenditures on production

methods improvements associated with materials costs and plant supervision costs

depend on the average annual amount spent per pair of production capacity, you

should view such expenditures as part of an ongoing effort to drive costs down rather

than as something to be done intermittently. For example, if you spend $1.00 per pair on

production methods improvement in Year 11 and $0 per pair in Year 12, the annual

average drops to $0.50 in Year 12 and some of the benefits gained in Year 11 will erode

from a lack of effort in Year 12. Likewise, a plant expansion will reduce the average

amount spent per pair unless total spending for methods improvements is increased in

proportion to production capacity. Also, you’ll find there are diminishing marginal

benefits to spending additional sums for production methods improvements—the

incremental benefits from increasing spending from the equivalent of $0.50 per pair to

$1.00 per pair of capacity will exceed the benefits associated with increasing spending

from $1.00 to $1.50 per pair; and so on.

You can readily check out the benefits versus the costs of making expenditures for

production methods improvements by observing the estimated effect on labor

productivity (line 3 in the compensation section) and by monitoring the estimated

impacts on materials costs, labor costs, plant supervision costs, and overall

manufacturing costs per pair each time you enter a different level of expenditure for

production methods improvement. By comparing the benefits and costs of several

“what-if” entries for production methods expenditures, you’ll be able to hone in on

what benefits you can capture from various levels of production methods expenditure in

any one year. As mentioned above, however, you will have to make production

methods expenditures every year to build and maintain the associated economic

benefits.

Compensation Decisions. You and your co-managers must make two

compensation decisions each year: (1) whether and how much to change the annual

wage paid to plant workers and (2) whether and how much to change incentive pay. The

compensation decisions made by prior management in Year 10 are shown in Exhibit 4-3.

The company’s Human Resource Department has done

The minimum annual wage for North America is $18,000; in Europe the minimum is $12,000, and
The minimum annual
wage for North America is
$18,000; in Europe the
minimum is $12,000, and
in Asia and Latin America
it is $2,500—unless
otherwise announced
19

careful analysis over the years to determine how

productivity responds to the various compensation

options. Exhibit 4-4 summarizes HR’s findings.

These findings have been incorporated into the

Section 4: Plant Operations

productivity estimate calculations (line 3 of the compensation decision section of the

Production and Labor Decisions screen in Exhibit 4-3). You can observe the estimated

impact of the compensation decisions entered by watching what happens to estimated

worker productivity and by looking at the effect on labor costs per pair produced in the

manufacturing cost calculations section; these estimates will help you judge whether to

change or stick with the decision entry. You’ll find it relatively easy to “what-if” a

variety of different compensation packages to arrive at one you deem attractive from a

productivity-enhancing standpoint and affordable from a cost perspective.

In deciding upon the annual wage, you can grant a wage increase, leave the wage

as is, or institute a wage cut. The annual wage amount is entered in thousands—a

wage of $22,400 is entered as 22.4; a wage of $3,100 is entered as 3.1.

Exhibit 4-4 Factors That Affect Work Force Productivity Compensation Factors Impact Comments Bigger percent increases in
Exhibit 4-4
Factors That Affect Work Force Productivity
Compensation
Factors
Impact
Comments
Bigger percent
increases in
annual wage
The greater the percentage increase in
the annual wage, the greater the positive
impact on workforce productivity. Annual
wage increases in the 5-10% range can
lead to productivity gains of as much as
6%. As the size of the annual wage in-
crease approaches 12% in any one year,
the productivity gains flatten out.
The projected productivity gain associated with
raising the annual base wage is indicated in the
calculations sections of the production and
labor decisions screen each time you make an
entry for the annual wage.
Zero increases
in the annual
wage and cuts
in the annual
wage
Cutting or even failing to increase the
annual wage can have a negative impact
on worker productivity, but can be
partially offset with:
Attractive incentive pay amounts
Favorable total compensation
packages relative to those of rival
companies
Annual wages cannot be cut below the required
minimums in each geographic region of the
world. The minimum annual wage for North
America is $18,000; in Europe the minimum is
$12,000, and in Asia and Latin America it is
$2,500—unless otherwise announced by the
game administrator.
Other nonmonetary productivity-
enhancing efforts (see Other Factors)
Incentive pay
per non-
defective pair
produced
The larger the percentage of total
compensation that comes from piecework
bonuses, the larger the annual boost to
worker productivity. However, once
incentive pay exceeds 25% of total
compensation, the incremental gains in
productivity become progressively
smaller and approach 0 as incentive pay
approaches 50% of total compensation.
No incentive is paid for defective pairs
produced in order to motivate workers to pay
close attention to quality and not engage in
“hurry-up” procedures that impair footwear
quality of the company’s products. Higher
piecework incentives help reduce the reject
rate.
The productivity impact of higher or lower incen-
tive pay is indicated in the calculations
sections of the production and labor decision
screen each time you make an entry for
incentive pay.
Total compensa-
tion (annual
wage plus
Providing higher total compensation
relative to competitors has a positive
impact on workforce productivity.
incentive pay)
relative to
rivals
Companies with the highest compensation
packages (wages plus total incentive pay) are
able to attract workers with good experience,
skills, and work habits, thus achieving higher
levels of productivity than would prevail if the
company was on the low end of the industry
pay scale.
Other Factors
Impact
Comments
Expenditures to
improve
production
Efforts to improve production methods
can lead to productivity gains of as much
as 10%, provided ample expenditures are
It will take sizable expenditures per worker
(mainly for training and skills building) over a
period of several years to achieve the maximum
20

Section 4: Plant Operations

methods

made on an ongoing basis over a period of years. The size of the gain is based on the amount spent on PMI per worker employed at the plant.

10% productivity gain. The productivity gain in any one year is indicated in the calculations sections of the production and labor decisions screen each time you make an entry for PMI.

Hiring additional

Raising employment levels at a plant can

Improves morale and job satisfaction; signals

workers

boost overall plant productivity as much

better job opportunities and greater job

Laying off

as 2%; however, the bigger the number of new hires, the smaller the gains because the productivity of new workers is lower than that of experienced workers.

security; boosts company reputation as a “good place to work.” However, newly hired workers are lacking in skills and experience compared to existing workers, and a big influx of new hires will dampen net productivity gains.

workers

Cutting plant employment levels reduces productivity anywhere between 0 and 10%, depending on the percentage of the work force that is laid off. Laying off only a few workers has a minimal effect on productivity—less than 2%.

Layoffs hurt morale and create worker anxiety over job security. Laying off the entire work force and temporarily shutting the plant down will lead to the maximum 10% decline in productivity when the plant resumes operations. The projected impact on productivity associated with layoffs is indicated in the calculations sections of the production and labor decisions screen.

Naturally, increases in the annual wage tend to boost worker productivity. Annual

wage increases in the 5-10% range can lead to productivity gains of as much as 6%.

However, as the size of the annual wage increase approaches 12% in any one year, the

productivity gains flatten out. Past 12%, the only productivity benefit you can gain

comes from a more favorable comparison with the compensation packages of rival

companies. Wages can be cut to the minimum allowed levels (see the insert on page 45)

to try to reduce labor costs but, as you might expect, wage cuts hurt worker

productivity—unless offset by other factors. The larger the cut, the bigger the adverse

impact because wage cuts boost workforce turnover (some of the company's best

workers will leave for better paying jobs elsewhere), reduce the morale and job

satisfaction of the remaining workforce, and result in the hiring of less experienced (less

productive) workers.

Paying workers a piecework incentive helps reduce reject rates and produces a con-

tinuing boost to worker productivity year after year. A $1.50 per pair bonus incentive

offered in Year 11 will motivate workers to produce more pairs in Year 11, and it will

motivate them to achieve still higher productivity levels in Year 12, Year 13, and

afterward even if the $1.50 incentive is not increased. Piecework incentives can be

used to supplement the minimum annual wage requirements but they cannot be used

as a substitute for the payment of the geographic minimums.

When a company's total compensation package at a particular plant location is

below the average of all other footwear companies having plants in the same

geographic area, worker morale suffers, the plant will lose some of its best workers to

better-paying rivals, and worker productivity at the plant is penalized. The bigger the

compensation gap, the greater the adverse effect on productivity at that plant, as the

plant’s most productive workers leave for better-paying jobs elsewhere. Conversely,

when a plant's workers are compensated at annual amounts above the geographic

region average, worker productivity is greater than it otherwise would be because of the

ability to attract and retain higher caliber workers. The productivity estimates

calculated for you on the screen cannot incorporate the impact of whatever changes

in compensation that rival companies may make, since there is no way to know what

they are going to do. The uncertainty surrounding how your company’s

compensation package will ultimately compare with that of rival companies is the

major reason why the calculated value shown for worker productivity is an estimate

rather than a certainty.

Section 4: Plant Operations

Consequently, you and your co-managers will need to consider carefully the size of

annual wage increases, the size of piecework incentives, the percent of total

compensation accounted for by incentive pay, and how well your workers are being

compensated relative to workers at competing companies (pay comparisons are

reported annually in the Footwear Industry Report). However, judging the effectiveness

of compensation decisions by whether they boost or hurt worker productivity misses

the mark. The bottom-line objective is to manage the company’s compensation

program and productivity-enhancing effort to minimize labor costs per pair

produced, not maximize the number of pairs each worker produces. There’s little

value in undertaking productivity-enhancing efforts that cost more than they are worth.

Hence you and your co-managers should always be alert to the effect of compensation

decisions and other productivity-related decisions on labor cost per pair produced and

on overall manufacturing cost per pair produced.

Decisions to Hire or Lay Off Workers. How many workers are needed at each

plant depends on (1) the number of pairs to be produced and (2) the productivity of the

workforce (measured by the number of pairs each worker produces on average during a

year). Once you and your co-managers have decided on the pairs to be manufactured

(which may or may not involve use of overtime) and have made all of the other

production and compensation decisions (many of which impact workforce

productivity), then you are ready to decide how many workers to employ. Based on the

number of pairs you have to be manufactured and the estimated workforce productivity,

the maximum number of workers needed is calculated and reported to you on line 4 in

the compensation section of the screen (see Exhibit 4-3). The “maximum” number

appearing on the screen (line 4) is based on the assumption that paying workers

overtime is to be avoided or at least kept to a minimum (in the event that the number of

pairs to be produced requires some use of overtime). The “minimum” number of workers

shown on line 4 assumes that the overall size of the workforce is to be kept to the

lowest possible number and that these workers will work the maximum 20% overtime to

produce the desired number of pairs.

Employing fewer workers than the “maximum” needed and relying on some use of

overtime acts to reduce plant supervision costs—currently, plant supervision costs per

worker employed are $6,000 in North America and $2,000 in the Asian plant. Should you

build plants in Europe or Latin America in upcoming years, plant supervision costs will

run $5,000 per worker in Europe and $2,000 per worker in Latin America. It is a simple

what-ifing exercise to try hiring fewer workers than needed to see if some use of

overtime production is economical. Don’t be surprised if the answer varies by plant

because of the differences in worker compensation and plant supervision costs.

You and your co-managers will have to decide which size workforce between the

maximum and minimum values to employ. Increasing total employment in a given year

can boost workforce productivity up to 2%, since it signals growing job opportunities

and greater job security. Decreasing employment (by laying off workers) has a negative

impact on morale and productivity—but the maximum effect even if all workers are laid

off and the plant is temporarily shut down is –10%. Note that on 2 lines above the

number of workers employed entry in Exhibit 4-3 you are provided the overall

productivity estimate for the upcoming year as well as productivity for the prior year.

This information gives you a basis for seeing whether the cumulative impact of all your

production and labor decisions on productivity, including hiring and layoffs, is positive

or negative compared to the prior year.

Actions to Reduce the Reject Rate. The reject rate at each plant is a function of (1)

annual quality control expenditures per pair produced, (2) the size of the piecework

Section 4: Plant Operations

incentive per pair produced, (3) the number of different models in the company's

product line, and (4) a “random” factor that takes into account the somewhat changing

mood and morale of the local workforce and whether, on certain given days and weeks,

workers are distracted by approaching holidays or adverse weather or internal plant

disruptions. The "standard" reject rate is 5.0% at the North American plant and 5.5% at

all other plants (unless otherwise announced). But the reject rates at each of your

company’s plants can differ from “standard” depending on how much you spend on

quality control, the piecework incentive, the number of models being produced, and the

random factor.

Higher annual quality control expenditures per pair produced tend to reduce the

reject rate below the standard, reflecting the benefits of training workers in total quality

management techniques. Raising the piecework incentive (say, from $1.00 to $1.25)

helps cut reject rates because of increased worker attention to accurate workmanship.

Workers are not paid a piecework bonus on pairs which fail final inspection; this policy

is a key part of the company's quality control strategy, since it motivates workers to

watch the details of what they are doing and not take unwise shortcuts to boost their

piecework output. Increasing the number of models produced increases reject rates,

owing to more frequent production run changeovers and reduced worker experience in

making each model. It is long-standing company policy to donate all defective pairs to

charitable organizations; thus, all pairs that fail final inspection represent deadweight

cost and lost revenues. As you can see from Exhibit 4-1, in Year 10 there were 168,000

pairs rejected at the company’s two plants—equal to a cost of about $213,000 (or about

$1.27 per pair as you can see in Exhibit 4-2). The cost impact of rejects is thus

significant enough to warrant close management attention.

Temporary Plant Shutdowns. Occasionally market conditions may make it

advisable to drastically cut production levels in one or more plants, perhaps even to

zero. To temporarily shut down production operations at a particular plant, all you

have to do is enter a zero for pairs to be manufactured on the manufacturing decisions

screen and a zero for the total number of workers employed. Variable costs at the

temporarily shut plant will then be zero for the year but your company will still incur full-

year depreciation charges and 25% of normal maintenance costs. Company

accountants will allocate the fixed costs to corporate overhead (which is, in turn,

allocated to all market segments based on pairs sold). When you decide to reopen the

plant (it can remain "temporarily shut" for as many years as desired), worker

productivity will resume at about 90% of the worker productivity value that

prevailed in the last year of plant operation.

Plant Upgrades and Capacity Additions
Plant Upgrades and Capacity Additions

In Exhibit 4-5, a second production-related screen shows involving plant upgrade

options, the expansion of existing plants, and the construction of new plants in Europe

and Latin America.

Exhibit 4-5
Exhibit 4-5

Section 4: Plant Operations

Plant Upgrades / Capacity Additions Screen
Plant Upgrades / Capacity Additions Screen
Upgrade options are paid for and come on line the year after being ordered.
Upgrade options
are paid for and
come on line the
year after being
ordered.

Plant Upgrade Options. There are six options for upgrading existing plants. Only

one option per year may be undertaken at the same plant, and a maximum of three

options can be chosen for any one plant. The nature and cost of the six options are

shown in Exhibit 4-6 below. You and your co-managers should take time to assess the

merits of each upgrade option because the cost-saving benefits vary quite significantly

from plant to plant and strategy to strategy.

The costs of plant upgrades are treated as additional investments and have a 20-

year service life depreciated on a straight-line basis at the rate of 5% annually. Upgrade

options come on line the year after being ordered. Payments to the suppliers of

upgrade options are made the year the option comes on line (i.e., the year after it is

ordered). An upgrade option can be ordered for a new plant the first year the new

plant is on line or any year thereafter; you cannot order upgrades for a new plant in

the same year you order its construction. Exhibit 4-6 Plant Upgrades Options Benefits Capital Investment Requirement
the same year you order its construction.
Exhibit 4-6
Plant Upgrades Options
Benefits
Capital Investment Requirement and
Impact on Annual Depreciation Cost
Option A
Reduces plant supervision costs
per worker by 40%
One-time capital investment of $1.75 million
per million pairs of plant capacity (has the
effect of raising annual depreciation costs by
20

Section 4: Plant Operations

$87,500 per year per million pairs of capacity)

Option B

Reduces production run set-up costs by 45%

One-time capital investment of $3.0 million per million pairs of plant capacity (has the effect of raising annual depreciation costs by $150,000 per year per million pairs of capacity)

Option C

Increases worker productivity by

One-time capital investment of $3.5 million per

20%

million pairs of plant capacity (has the effect of raising annual depreciation costs by $175,000 per year per million pairs of capacity)

Option D

Uses new equipment and a TQM program to boost footwear quality by 35 points

One-time capital investment of $4.0 million per million pairs of plant capacity (has the effect of raising annual depreciation costs by $200,000 per year per million pairs of capacity)

Option E

Extends the allowable overtime production percentage from 20% to 30%

One-time capital investment of $2.5 million per million pairs of plant capacity (has the effect of raising annual depreciation costs by $125,000 per year per million pairs of capacity)

Option F

Increases plant capacity by 25%

One-time capital investment of $5.5 million per million pairs of plant capacity (has the effect of raising annual depreciation costs by $275,000 per year per million pairs of capacity)

Plant Construction and Plant Expansion Alternatives. New plants in Europe and

Latin America may be constructed in any of three sizes: small (1 million pairs per year),

medium (2 million pairs per year), and large (3 million pairs per year). To construct a new

plant in Europe or Latin America, simply select Small, Medium, or Large. Construction

of a new plant takes one year.

For example, decision to build a new plant in Year 11

means the plant will come on line ready for full production at the beginning of Year 12.

While your company cannot begin sales and marketing operations in Latin America

until Year 12, you can initiate construction of a plant in Latin America in Year 11 in